23 Apr Vedanta v. Lungowe Symposium: Potential Implications of the UKSC’s Decision for Supply Chain Relationships
In this post, I will focus on the implications of one of the central questions that the UK Supreme Court (‘UKSC’) addressed in its much-awaited Vedanta Resources PLC and anor v Lungowe and orsjudgment: whether the claimants’ pleaded a real triable issue against Vedanta. This issue very much boiled down to the question of whether a parent company may owe a duty of care to persons harmed by the actions or omissions of its foreign subsidiary. Relying on the basic tort of negligence principles, the UKSC held that such a duty by a parent company would not be a novel category [para.54]. The court affirmed the point made in earlier case law that there is no separate category of negligence for this type of parent-subsidiary-third party relationship. Rather, what was before the court was simply a matter of ‘whether A owes a duty of care to C in respect of the harmful activities of B’ [para.54].
In deciding on whether Vedanta may owe a duty of care to the communities harmed as a result of the environmental pollution caused by the mining activities of its Zambian subsidiary, the UKSC focused on whether there was an arguable case that Vedanta sufficiently intervened in the management of the mine owned by its subsidiary [para.44]. For the UKSC, the most compelling indicator of a high level intervention was found in the public disclosures made by Vedanta in its sustainability reports which the Court considered an 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” [para.61].
According to the UKSC, even if the parent company has not implemented in practice what it has disclosed in its public disclosures, it may still be considered to have assumed a duty of care [para.53].
Implications for supply chain relationships
Several features of the UKSC’s analysis of the ‘real triable issue’ question shows that this judgment can have implications beyond parent-subsidiary relationships.
First, the UKSC emphasized (agreeing with Sales LJ in AAA and ors v Unilever PLC and anor) that the parent-subsidiary relationship did not give rise to a distinct category of negligence. It is not the parent’s ‘ownership’ of shares in a subsidiary that determines the level of supervision/control exercised for purposes of the duty of care assessment. The principle applied is a generic one which can apply to other triangular relationships similar to the one present in Vedanta v Lungowe. Second, the UKSC refrained from identifying categories of relationships that may give rise to a parent duty of care in such triangular relationships [para.51]. It recognised that ‘[t]here is no limit to the models of management and control which may be put in place within a multinational group of companies.’ Third, in fleshing out whether there was an assumption of responsibility on the part of the parent, the UKSC focused (like Chandler v Cape PLC) not on whether the parent company exercised a high level of general control over the subsidiary, but whether the parent exercised supervision and control over the particular damaging activity undertaken by the subsidiary.
The UKSC’s approach in this case to the question of ‘assumption of responsibility’ allows for its findings to be applied in the supply chain context. The court’s flexible and pragmatic approach to the modern business relationships of large corporations allows for future claimants in supply chain settings to argue that a lead purchasing company is exercising sufficient control over a particular aspect of the supplier’s business. In this respect, neither Chandler nor this judgment limit the guidance provided to business relationships based on ownership. It is common for large brands to include in their supplier contracts codes of conduct requiring suppliers to comply with certain labour, health and safety, and environmental standards (see e.g. Jabir v KiK). These are similar to group-wide corporate policies. These contractual requirements sometimes include providing training to suppliers, purchaser monitoring performance via its own audits or requires supplier to obtain audit certificates showing compliance, requirements for correction of shortcomings identified via audits, provide company-based grievance mechanisms for affected persons and finally sanctions for failure to correct problems (which may include termination of the business relationship). The relationship in a supply chain context may in certain circumstances be as tight as it can be in certain parent-subsidiary contexts. This can be true, for example, in relation to certain aspects of the supplier’s business affecting particularly its employees or informal workers in the chain. When lead companies set such standards for their suppliers and supervise these closely, they typically disclose these efforts on supplier relationships and the levels of supervision exercised over the supplier’s labour or environmental performance in their sustainability, human rights, or modern slavery reporting.
It is yet to be seen how the merits of the negligence claim against Vedanta will be decided by the trial judge. But at least for the preliminary stages of litigation, in light of the increasing reporting requirements for human rights and environmental issues, the bar set by the UKSC does not seem unsurmountable for showing an arguable case for a sufficiently high level of supervision by the parent/lead over the particular activity that has caused the harm in similar triangular relationships. As observed by Gabrielle Holly, companies may choose to distance themselves from subsidiaries or suppliers for fear of triggering a duty of care as a result of this ruling, but the increasing regulatory trends in favour of reporting and due diligence on human rights will make such a move difficult for companies covered by such rules.
Even though the Appellants have downplayed the importance of this judgment as a mere ‘procedural decision’, the UKSC’s findings in this case will have a significant impact on any similar triangular claim relying on the common law tort of negligence, within or beyond the UK. This extends to future cases like Jabir v KiK or Akpan v Shell brought in Germany and the Netherlands respectively for harms suffered in Pakistan and Nigeria where courts consider as authoritative the English common law standards in tort.