The sins of the child: the liability of parent companies for actions of foreign subsidiaries

Written by Miriam Kleiner.

Imagine this – you are the director of an Australian holding company. 

The holding company has many subsidiaries, some of which are incorporated in developing jurisdictions.  There is a global policy in place for the group which requires that any waste be disposed of in a legal and responsible fashion.  Management has been given training in the policy and the holding company publishes an annual report which includes statements regarding the environmental pedigree of the group.  Later, you find out that one of the subsidiaries has been illegally dumping waste and this has poisoned a local water supply in Africa.  Is the Australian holding company liable for this?

This fact pattern is similar to a case which recently came before the United Kingdom Supreme Court ("Court") in Vedanta Resources PLC and another v Lungowe and others [2019] UKSC 20.  The Court found that there was an arguable case that the English parent company, Vedanta Resources plc ("Vedanta") owed a duty of care to a group of 1,826 Zambian citizens for alleged torts and breaches of statutory duty committed by its Zambian subsidiary, Konkola Copper Mines plc ("KCM").  There have also been a number of cases in other common law jurisdictions (e.g. Canada and New Zealand) which suggests a trend is developing regarding the duty of care of a parent company.

Key takeaways

Whilst Australian courts have not yet applied the duty of care to Australian holding companies in relation to foreign subsidiaries in this manner, it is possible that this will occur, and it may be prudent for in-house counsel and directors of multinational parent companies to:

1. review any group-wide policies that are in place and consider how they are communicated, monitored and enforced;
2. consider the levels (e.g. local subsidiary level or central parent level) at which important issues are dealt with and assess whether these levels are appropriate;
3. assess whether public statements and reports could be interpreted as asserting responsibility for the application and implementation of group-wide standards to subsidiaries. If so, consider whether this is accurate and whether this should continue; and
4. consider how a parent company could more effectively mitigate the risks of a foreign subsidiary breaching local laws (especially relevant environmental and human rights laws).

The facts

The claimants consisted of 1,826 Zambian citizens living in the rural farming communities of Chingola, Zambia.  In 2015, the claimants initiated proceedings in England, seeking redress for alleged harm caused by the discharge of toxic matter from the Nchanga Copper Mine ("Mine") into surrounding watercourses.  

The claimants served proceedings on two defendants:

1. KCM, the immediate owner and operator of the Mine, incorporated in Zambia; and
2. Vedanta, the ultimate parent company of KCM, incorporated and domiciled in the United Kingdom and listed on the London Stock Exchange. Vedanta does not wholly own KCM, but by its own published materials, states that it effectively controls KCM as though KCM is wholly owned.

The claimants alleged that both defendants caused harm to the claimants' health and farming activities, in breach of common law negligence duties and statutory duties under Zambian environmental and public health legislation.

The findings

The Court found that there had been a breach by Vedanta and observed that:

there is no separate, distinct test that determines whether a parent company owes a common law duty of care to third parties in relation to the activities of its subsidiary.  Rather, ordinary and general principles of tort law apply.

In determining whether a duty exists, the critical consideration is the extent to which the parent company availed itself of the opportunity to take over, intervene in, control, supervise or advise the management of relevant operations (including land use) of the subsidiary.  Direct or indirect ownership by the parent of all or a majority of the subsidiary's shares creates the opportunity to intervene, but does not, of itself impose a duty of care.

Examples of when a parent may incur a duty include, but are not limited to:

• where the parent has in substance taken over the management of the relevant activity of the subsidiary in place of or jointly with the subsidiary's own management;
• where the parent has given relevant advice to the subsidiary about how it should manage a particular risk;
• where the parent does not merely proclaim group-wide policies, but also takes active steps, by training, supervision and enforcement, to see that the policies are implemented;
• where the parent, in published materials, holds itself out as exercising a sufficiently high degree of supervision and control of its subsidiaries, even if it does not in fact do so;
• where the parent and subsidiary operate in the same line of business;
• where the parent had superior or specialist knowledge compared to the subsidiary;
• where the parent knew or ought to have known, the subsidiary's system of works to be unsafe; and
• where the parent knew or ought to have known, that the subsidiary (or the persons affected by the subsidiary's activities) was relying on its superior knowledge for their protection.

Comment

A number of principles can be taken from the Vedanta case.

First, the mere existence of global policies issued by the parent company which apply to the operations of its foreign subsidiary would not give rise to a duty owed by the parent to those affected by the operations of its foreign subsidiary.  There needs to be clear evidence that the parent company exercised active control over the operations of its foreign subsidiaries.  There is a distinction between a parent company which controls the material operations of its subsidiary, and a parent company which merely issues policies and standards which are intended to apply to the whole group. 

Second, active involvement by the parent in the operations of its subsidiary would likely increase the risk of a finding that the parent owes a duty to those affected by its subsidiary's operations.  In this case, the Vedanta parent was actively involved in managing the operations of its subsidiary, by providing health, safety and environment training to its subsidiary's staff and by providing various operational services.

Third, courts may infer an assumption of responsibility by the parent based on public statements made by the parent.  A feature in Vedanta (which supported a finding that a duty of care was owed by the parent) was the fact that the Vedanta parent had also made various public statements emphasising its oversight over its subsidiaries and its commitment towards addressing environment risks arising from its Zambian subsidiary's mining operations.