02 May 2019

Parent company liability & class actions – UK Supreme Court delivers landmark judgment

By Wilson Antoon, Natalie Quinlivan and Darren Roiser

The recent landmark judgment of the UK Supreme Court in Vedanta Resources PLC and another v Lungowe and others [2019] UKSC 20 (“Vedanta”) has confirmed that a lawsuit brought by 1,800 Zambian villagers can be heard in London despite arguments by Vedanta that the case should be tried by the Zambian courts.  The decision undoubtedly paves the way for more environmental and human rights class-action style claims to be brought in the UK, specifically targeting large multinationals with global operations.  Those who operate in high risk sectors, such as natural resources and steel, are particularly vulnerable.    

The Supreme Court’s key findings were that: 

• it is arguable that a UK parent company owes a duty of care to those affected by its subsidiaries’ operations in foreign countries if it has sufficiently intervened in those operations; and

• the English courts may in certain cases exercise jurisdiction over claims against both the UK parent and foreign subsidiary, even if all the events occurred overseas and the only connection to the UK is the parent company’s domicile. 

There are a number of similar cases progressing through the UK courts[1].  Okpabi and others v Royal Dutch Shell and another,  for example, relates to a claim by 40,000 Nigerian fishermen against Royal Dutch Shell about alleged oil spills in the Niger Delta.  This is currently being appealed to the Supreme Court. 

‘Class actions’ in the UK 

‘Class actions’ are not a new phenomenon in the UK.   That said, they are evolving at pace, largely due to significant investments by claimant firms and litigation funders.  The future they hope to shape is in so-called “class action tourism”.

The key procedural mechanism for bringing a collective action in the UK is a Group Litigation Order (“GLO”).  A GLO is a court order which certifies that the court may manage claims together.  To grant a GLO, the court must be satisfied that the claims “give rise to common or related issues of fact or law”.   In practice, this is usually easy for a claimant firm to satisfy in respect of environmental or human rights cases where the damage relates to a single catastrophic event.  

The common issue test is also suited to shareholder actions, competition claims, product liability and data and privacy claims.

Parent company liability for subsidiary operations 

The argument put forward by claimants in the English courts is that a UK parent company owes a direct duty of care in relation to the negligent acts of the foreign operational subsidiary.  

In the Vedanta case, residents of a Zambian city brought civil proceedings against Vedanta, a UK-incorporated parent company, and its Zambian subsidiary, Konkola Copper Mines Plc (“KCM”), claiming that waste discharged from a copper mine - owned and operated by KCM - had polluted the local waterways, causing personal injury to the local residents, as well as damage to property and loss of income.  

The Supreme Court upheld the decisions of the lower courts that it was arguable Vedanta owed a duty of care in relation to the activities of KCM.  The Supreme Court stated: “the critical question is 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” (at [44]).   

The Supreme Court regarded it “well arguable” that a sufficient level of intervention by Vedanta may be demonstrated at trial based on (at [61]):

• Vedanta’s published materials in which Vedanta asserted its own assumption of responsibility for the maintenance of proper standards of environmental control over the activities of its subsidiaries, including the operations at the mine; and

• Vedanta implementing those standards through training, monitoring and enforcement.  

UK businesses should therefore consider their level of control over and intervention into their subsidiaries’ operations to identify and mitigate risks, including through a review of their policies, shareholder and management agreements and public statements. 

English courts’ jurisdiction over mass incidents in foreign countries 

The decision of the first instance judge[2],  upheld by the Court of Appeal[3],  found the English court had jurisdiction to hear claims against Vedanta, even though the alleged tort and harm occurred in Zambia.  The Supreme Court upheld this finding but laid out different reasoning for reaching its conclusion.  

The Supreme Court did not agree that England was the proper place for the trial.  The Supreme Court identified that the “connective factors” overwhelmingly pointed to Zambia being the proper place for the trial (at [85)].  The Supreme Court disagreed with the lower courts treating the risk of “irreconcilable judgments” (which arises if the parent is sued in England, and the subsidiary in Zambia) as the decisive factor pointing to England as the proper place (at [79]).  Rather, in circumstances where Vedanta agreed to submit to the jurisdiction of the Zambian courts, the claimants could not rely upon the risk of irreconcilable judgments to argue England was the proper place (at [79]).  This was the claimants’ own choice.   

The Supreme Court confirmed the risk of irreconcilable judgments was not a “trump” card.  But it is still a relevant factor when balancing the connecting factors in cases where the UK parent has not agreed to submit to the jurisdiction of the foreign court (at [84]).

The Supreme Court ultimately upheld the lower courts’ decision to allow the case to proceed in England by not interfering with the first instance judge’s finding of a real risk that substantial justice will not be obtainable in Zambia.  The claimants, who are all living in poverty, would otherwise struggle to access justice in Zambia where litigation funding and “no win no fee” arrangements are prohibited (at [89-90]).

Class actions – a growing risk for UK businesses

Unlike the more developed class action regimes in Australia and the US, the UK regime is relatively new.  It is also limited to an “opt-in” procedure where claimants must sign up on the relevant GLO register to participate in the claim.  This may mean the UK regime is less attractive to claimant firms and funders as individual claimants must take positive steps, including filing a Claim Form, to participate in the action.  It may present a challenge to the financial viability of mass claims, particularly if individual damages are small compared to an overall high claim value.   

Since GLOs were introduced into CPR Part 19 in May 2000, there have been proposals to introduce US- and Australia-style “opt out” class actions[4].   The UK government rejected the idea in July 2009, opting instead to consider possible collective action procedures sector-by-sector.  To date, the only collective proceedings regime to be successfully introduced relates to competition cases in the Competition Appeal Tribunal (“CAT”).  This regime has experienced a slow start with only two collective action proceedings being brought over the past 4 years and neither receiving certification by CAT.  The UK Court of Appeal recently ruled that CAT must reconsider its decision not to certify one of the applications relating to Mastercard and its setting of multilateral exchange fees[5] . This is the biggest class action in British legal history which, if successful, will result in a £14 billion pay-out. 

Conclusion

Even if legislative developments in this area stall, GLOs under the current generic regime are set to rise in coming years.  The “closed class” model of Australian class actions (where all class members have signed up to a funding agreement) has been the preferred approach of litigation funders in Australia.  The “opt-in” procedure in the UK is similarly unlikely to deter claimant firms and funders, who have taken aggressive and proactive steps to sign up claimants. 
As class action activity in the UK increases, UK companies should factor in class action risk in their future business planning and, following the Vedanta decision, conduct a risk assessment on their level of intervention in operations of foreign subsidiaries.  


[1] [2018] EWCA Civ 191

[2][2016] EWHC 975 (TCC)

[3][2017] EWCA Civ 1528 

[4]Civil Justice Council, Final Report: “Improving Access to Justice through Collective Actions”, November 2008: https://www.judiciary.uk/wpcontent/uploads/JCO/Documents/CJC/Publications/CJC+papers/CJC+Improving+Access+to+Justice+through+Collective+Actions.pdf

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