Business and Human Rights Symposium: Evolution of the Duty of Care Doctrine in Cases of Business-Related Human Rights Abuses

[Radu Mares is an Associate Professor, Raoul Wallenberg Institute of Human Rights and Humanitarian Law at Lund University (radu.mares@rwi.lu.se)]

The last two decades marked a dramatic expansion of civil liability cases against parent companies. In this period, transnational litigation offered a way to get around the legislative inaction or slowness. Indeed, civil liability principles already exist in all home states. They apply to both natural and artificial persons and are not inherently encumbered by territorial limitations. Surely plaintiffs have faced jurisdictional hurdles and inequality of arms in their David-Goliath search for justice in courts abroad. More welcoming to their pleas have been common law jurisdictions. However, what surprised was the dearth of legal precedents holding parent companies liable for subsidiary misconduct. Under common law, a duty of care (DoC) has to be found in precedents or be created by meeting the Caparo criteria. Furthermore, the corporate veil principle in corporate law and the tort law principle of non-liability for a third-party misconduct loomed large. As courts have had a ready-made legislative basis in tort-negligence law on which to hold MNEs liable for human rights abuses abroad, what has become clearer after two decades of litigation?  

The corporate veil is not an obstacle if the direct negligence of parent companies is established. Courts have explained that parent companies are not exempted from general tort law; the parent’s liability is not a distinct category in negligence law. However, judges in Chandler and Vedanta emphasize that such direct liability cases should not be mistaken for strict liability; they remain fault-based cases with no automatic imputation of liability to parent companies solely because of their shareholding and inherent capacity to control a subsidiary. Notably, courts show self-restraint in applying civil liability principles to not in effect lift the corporate veil and create inconsistencies between tort law and corporate law. Thus progressive DoC caselaw does not heed the long-voiced criticism of the corporate veil as unfair and inefficient; the separate corporate personality affirmed in Salomon and encountered in most jurisdictions is not being disregarded. Direct liability cases go around the corporate veil and render it irrelevant as long as plaintiffs succeed in proving parent companies’ own negligence.

Conduct by omission is not off limits as courts have established that direct liability can follow a parent company’s inactions. Its culpable conduct can be a mix of commissions and omissions. Chandler – the first final judgement affirming the parent’s duty of care – appears groundbreaking in the way it assigned liability for failure to act. Building on precedent, the court constructed the ‘assumption of responsibility’ test, which combined a parent’s superior knowledge with a subsidiary’s reliance on it for expertise and advice. Such liability test pinpoints the culpability (unreasonable conduct) of parent companies for its inactions. Importantly it does not attach liability to a bystander parent company and its overall omission to bring subsidiaries into observing human rights. Were that to happen, judges would in effect lift the corporate veil and open a backdoor to enterprise liability reasoning. Notably, plaintiffs in subsequent cases sought to apply the same Chandler template with mixed results as some courts indicated Chandler was a special case and not all cases of parent liability fit into that template. That prompted the Vedanta court to exemplify four scenarios where parent companies could be liable. The liability for parent company’s inaction continues to pose a great challenge for plaintiffs.

Proximity between plaintiffs and parent companies is an element of tort liability. In foreign direct liability cases, parent and plaintiffs are geographically remote and their relation mediated by subsidiaries, but some decisions of parent companies increase proximity. Businesses can trumpet their CSR commitments (promise), guide (influence) or interfere (control) too much with subsidiary operations. Proximity is a gate through which such voluntary decisions acquire legal effects. A parent can inadvertently bring itself in closer proximity with victims abroad, even if this in itself is not determinative of liability. Common law judges can and have used proximity as an expedient way to dismiss cases, but recent caselaw cautions companies to not see in geographical remoteness a blanket protection.

The standard of reasonableness in negligence law is evolving. The reasonable person concept sets a standard of culpability. Some regard it as an ‘empty vessel’ that enables judges to determine what is socially acceptable. While this concept might be rather indeterminate and lead to legal uncertainty, it also ensures law’s capacity to adapt to societal changes. What might have appeared reasonable conduct a generation ago might be indefensible nowadays. The standard of care, of what an informed and attentive professional is and should do, is shifting.  This is visible in negligence law providing for the DoC owed by the company to other persons, as well as in company law outlining the directors’ DoC owed to their company. The OECD Principles prompt directors to account for stakeholders and ethical aspects, and for how ESG factors matter for investors and a business in a modern economy. Duties of care in tort law and company law complement each other to problematize and dismiss some longstanding simplifications that render businesses decisions potentially negligent and shortsighted.

Soft law instruments on corporate responsibilities are relevant in civil liability cases. Indeed, plaintiffs regularly invoke international instruments to demonstrate sub-par performance. Judgements in Canada and Netherlands mention soft law as a factor in defining appropriate conduct. Just as with CSR tools and business practices showing what is feasible, soft law guidance can sip into civil liability through the reasonable person standard and raise the legal threshold of what a company should know and do. The fact that soft law pronouncements are not legally binding does not mean they have no legal effects, even though such effects are subtle and incremental.

The accumulating case law contributes to the specification of duty of care. In a recent Shell case, the Dutch court found the parent company in breach of its duty of care and required it to install leak detection devices (an injunction). However, as the court affirmed a DoC it refused to hold the parent company liable for compensation and clean-up of oil pollution in Nigeria. This reveals the variety of remedies under consideration and show that a finding of DoC does not necessarily result in reparations for victims. Through such rulings on remediation, the accumulating caselaw will further clarify what due care entails for parent companies.

The recent due diligence (DD) legislations pioneered in France, and followed in Germany, have not changed civil liability rules but rely on fines and injunctions to obtain compliance. How non-compliance with the law (failure to exercise DD) would count in a negligence case (liability for damage) remains to be seen. Unless civil liability laws are modified, the appears to be no automatism: compliance with DD per se does not offer businesses a defense, and non-compliance with DD regulations does not per se represent a breach of DoC triggering civil liability. The sanctioning regimes for failures of DD and for damages can be separate for now but are certain to interact. Nothing precludes courts applying negligence law to factor in such non-compliance by using tort concepts such as causality and reasonable person. Nowadays France offers the judicial laboratory as several cases are pending in its courts. This uncertain relation between new statutory DD laws and DoC case-law mark a stage in the evolution of the DoC doctrine as the regulatory landscape in business and human rights is changing.

More judgements on parent companies’ DoC could be triggered by several possible reforms. The dearth of legal precedents is partly due to the difficulties plaintiffs have faced in accessing evidence to prove their case. Reversing the burden of proof, offering victims a choice of law and forum, judicial cooperation among states are ways to increase access to civil remedies. That means that even without modifying the standard of fault, the requirements and thresholds for civil liability, caselaw would increase dramatically and further specify what care means for parent companies.

The versatility of tort and negligence law is visible in the variety of plaintiffs and corporate defendants. Thus, stakeholders affected by MNEs are workers as well as local communities. Also lawsuits have targeted various enterprise structures and global value chains charging the liability of a business for the conduct of subsidiaries, of partners such as police and military, private security and paramilitary groups, and even suppliers and contractors. However, the odds vary significantly and success measured in final judgements (settlements aside) has been so far confined to parent-subsidiary relations. 

In conclusion, civil liability of corporate groups presents an interesting case of legal evolution. Notable advances in caselaw need to be read with a keen eye to legal thresholds and potential repercussions outside tort law. There are high thresholds in establishing corporate liability for subsidiaries and business partners’ misconduct. Not contemplating a dramatic lowering of thresholds, courts are careful to develop tort law without introducing frictions with other bodies of law (corporate law) or branches of government (the legislative). So far there has been gradualism in both caselaw and the legislative activity in home countries of MNEs. Civil liability and especially negligence liability – through the DoC and ‘reasonable person’ standards – co-evolve with societal expectations, business practice, soft law and due diligence regulations. Nowadays plaintiffs can put some faith in an accumulating body of judicial precedents and legislative changes signaling to parent companies that the days of soft law and corporate voluntarism are coming to an end.