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Focus on Regulation

Jurisdiction and parent company liability – Court of Appeal keeps door ajar for extra-territorial human rights related claims

The Court of Appeal has handed down its judgment in a landmark case on jurisdiction and parent company liability (Lungowe and Ors. v Vedanta Resources Plc and Konkola Copper Mines Plc [2017] EWCA Civ 1528).  The judgment increases the likelihood that cases will be brought in the English courts against UK domiciled companies in relation to adverse human rights impacts associated with the operations of their overseas subsidiaries.  At the same time, it frees foreign domiciled subsidiaries to argue that, notwithstanding a claim against their parents, England is not the appropriate forum to hear claims against them.  This post summarises the facts and the judgment, comments on how it will affect future human rights related parent company liability cases and makes some practical recommendations on how businesses can reduce the risk of involvement in the underlying human rights impact.

The facts

Vedanta is a UK domiciled, London listed mining conglomerate.  It operates through a network of locally owned subsidiaries, including in Zambia where its subsidiary, Konkola Copper Mines (“KCM”), has a licence to extract copper from the Nchanga mine.  In 2015, claims were brought in the UK against Vedanta by a group of Zambian subsistence farmers alleging personal injury, damage to property and loss of income flowing from pollution from the Nchanga mine.  Using Vedanta to “anchor” the claims in the English courts, the claimants obtained permission to serve KCM through the “necessary and proper party gateway” (Paragraph 3.1 of Practice Direction 6B).  Vedanta and KCM challenged the jurisdiction of the English courts on various grounds but these challenges were dismissed at first instance by Coulson J.  Vedanta and KCM appealed and, on Friday 13 October, the Court handed down its judgment.

The judgment

The Court unanimously dismissed Vedanta and KCM’s appeals (see judgment).

In order to determine jurisdiction over the UK domiciled parent company, the starting point is Article 4 of the Recast Brussels Regulation (the “Regulation”) as applied in the ECJ case of Owusu v Jackson.  This precludes the court from declining mandatory jurisdiction where the defendant is domiciled in the UK.  It was held that, in principle it may be possible to argue that the proceedings amount to an abuse of EU law.  However, the threshold is high and requires evidence that the party has conducted itself in such a way as “to distort the true purpose of that rule of jurisdiction“.

For as long as the UK remains bound by the Regulation and subject to the jurisdiction of the ECJ (and, for that matter, until the Supreme Court overturns domestic authority to the same effect), it will generally not be open for parties to argue that Article 4 leaves any discretion to the English courts to reject jurisdiction over a UK domiciled company.  (If, however, the case against the parent is weak, it will of course be open to them to apply to have it struck out on the merits).

In order to determine jurisdiction over the foreign subsidiary under the necessary and proper party gateway, the Court considered the following issues: (1)    whether the claimants’ claim against KCM has a real prospect of success; (2) if so, whether there is a real issue between the claimants and Vedanta; (3) whether it is reasonable for the court to try that issue; (4)   whether KCM is a necessary and proper party to the claim against Vedanta; and (5) whether England is the proper place in which to bring that claim.

On the basis that his conclusions were not “plainly wrong”, that the court had not misdirected itself as to the law, failed to take into account what mattered nor taken into account what did not, the Court was cautious not to substitute its evaluative judgments for those made by Coulson J and adopted a self-consciously “diffident” approach.

However, elements of the judgment in relation to issues (2) (whether there is a real issue between the claimants and Vedanta) and (5) (whether England is the proper place in which to bring the claim) which are novel and will have a bearing on how similar cases are decided in the future.

Parent company liability

Jurisdictional questions of this nature will often hinge on whether there is a real issue to be tried between the claimants and the “anchor”, UK domiciled parent company.  This involves a preliminary assessment of the merits of the case against the parent.  After reviewing the cases on parent company liability, the court held that certain propositions can be derived from these cases which may be material to the question of whether a duty is owed by a parent company to those affected by the operations of a subsidiary:

  • The starting point is the three-part test of foreseeability, proximity and reasonableness (Caparo v Dickman). The fact that Vedanta is KCM’s holding company was not sufficient to satisfy this requirement, so it was necessary to identify additional factors before a properly arguable case could be made out.
  • A duty may be owed by a parent company to the employee of a subsidiary, or a party directly affected by the operations of that subsidiary, in certain circumstances. At first instance, Coulson J held that while it was possible for a parent to owe a duty of care to a non-employee third party, it was more likely that a duty would arise with respect to an employee.  It is significant that the Court chose not to make such a distinction in the appeal judgment – this will give confidence to non-employee third parties to commence claims against both parent and subsidiary.
  • Those circumstances may arise where the parent company (a) has taken direct responsibility for devising a material health and safety policy the adequacy of which is the subject of the claim, or (b) controls the operations which give rise to the claim.
  • Chandler v. Cape Plc and Thompson v. The Renwick Group Plc describe some of the circumstances in which the three-part test may, or may not, be satisfied so as to impose on a parent company responsibility for the health and safety of a subsidiary’s employee.
  • Such a duty may be owed in analogous situations, not only to employees of the subsidiary but to those affected by the operations of the subsidiary.
  • The evidence sufficient to establish the duty may not be available at the early stages of the case. This final point is also significant.  In future cases, courts will likely be hesitant to conclude that there is no real issue to be tried between claimant and parent at an interlocutory stage and rather defer it to be determined at the hearing.  By that stage, the claimants will already have succeeded in anchoring jurisdiction over the parent and subsidiary in the English courts.  If the claim against the parent then fails, the claim against the foreign subsidiary may still subsist even though it has little, if any, residual connection to the jurisdiction.

The court considered the following evidence relevant to the existence of a duty of care as between Vedanta and the claimants: a global sustainability report which stressed that oversight of its subsidiaries ultimately rests with the Vedanta board; a management agreement pursuant to which Vedanta agrees to provide training and other services to KCM, including in relation to the environment and health and safety; public statements by Vedanta about managing environmental risk; and witness evidence from a KCM employee about the degree of oversight and control exercised by Vedanta personnel.  On balance, the more integrated a parent company and its subsidiaries are and the more attention the parent pays to the relevant practice of its subsidiaries, the more likely it is that a duty of care will arise.

Forum non-conveniens

With respect to Issue 5 (whether England is the proper place in which to bring the claim), the Court followed Coulson J in determining the issue in accordance with CPR 6.37(3) (“The court will not give permission [to serve the claim form out of the jurisdiction] unless satisfied that England and Wales is the proper place in which to bring the claim”) and Lord Goff’s formulation in Spiliada (“the task of the court is to identify the forum in which the case can be suitably tried in the interests of all the parties and for the ends of justice”). 

At first instance, Coulson J determined that the existence of an arguable case against the parent in the jurisdiction “virtually concludes” the issue of appropriate forum.  The prospect of parallel proceedings (against the parent in the UK and the subsidiary in Zambia) was “unthinkable” and therefore, notwithstanding the fact that the claimants were all Zambian, the damage occurred in Zambia and the applicable law was primarily Zambian, England was the proper place to bring the claim.  This line of reasoning was subsequently endorsed by a different division of the High Court in AAA and Ors. v Unilever and Unilever Tea Kenya.  On appeal, it was held only that Coulson J was “entitled to this view”.  However, the court does not endorse his reasoning and cites without criticism the defendants’ submissions to the opposite effect.  As such, it remains open to defendants in future cases to argue that, notwithstanding the existence of a real issue as between the claimants and the parent which is within the jurisdiction of the English courts, England is not the appropriate forum to hear the claims against the subsidiary.

Finally, the Court made an interesting (and apparently unprompted) policy point about “exporting” cases from countries where access to justice is a problem: “There must come a time when access to justice in this type of case will not be achieved by exporting cases, but by the availability of local lawyers, experts, and sufficient funding to enable the cases to be tried locally.”  In light of this statement, it will be open to parties in the future to argue that it is not in the “ends of justice” to export cases to the UK; rather, in the long term, that the legal infrastructure in the territory where the wrong takes place should be allowed to develop so that claims can be heard there.

Conclusion                                                       

The judgment clarifies and, arguably, expands the scope of parent company liability and makes it more difficult for a court to determine at an interlocutory stage that there is no real issue to be tried between a claimant and a parent company.  This will likely see an upswing in claims in the English courts against the UK domiciled parents of overseas operating companies.  At the same time, it can be read to breathe some life into the doctrine of forum non-conveniens, increasing the likelihood of the court accepting jurisdiction over claims against the UK parent but not the foreign subsidiary.  At first instance, courts continue to enjoy a significant amount of discretion as to how they apply the rules and exercise their judgment.  In order to mitigate against such uncertainty and the prospect of human rights related claims in the English courts and elsewhere, companies should operationalize the UNGPs, taking steps to “know and show” that they respect human rights and, to the extent possible, this process should be carried out at an operating subsidiary level, where there is a greater likelihood that any adverse impact will take place and greater scope for successful preventative action.