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Legal case

D&O angle on Okpabi v RDS — parent company liabilities may increase directors’ personal exposure

The matter is of particular interest with regard to the position of RDS, which is alleged to have owed tortious duties to the claimants.

Okpabi v Royal Dutch Shell [2021] UKSC 3

The claimant residents of the Niger Delta are pursuing proceedings in the Technology and Construction Court against the UK company Royal Dutch Shell Plc (“RDS”) and its Nigerian subsidiary Shell Petroleum Development Company of Nigeria Ltd (“SPDC”) seeking damages for negligence in relation to contamination allegedly caused by leaks from oil pipelines operated by SPDC pursuant to a joint venture.

The matter is of particular interest with regard to the position of RDS, which is alleged to have owed tortious duties to the claimants because it exercised a high degree of control over SPDC’s activities.

RDS issued an application disputing the jurisdiction of the English courts. The application was heard by Fraser J who concluded that there was no arguable case that RDS owed a duty of care to any of the claimants.

The matter progressed to the Court of Appeal. Sir Geoffrey Vos (as he then was) and Simon LJ agreed with Fraser J that there was no arguable case on the existing evidence and that new evidence would not assist the claimants.

Sales LJ’s dissenting judgment stated (at paragraph 142) that if RDS “can be shown to have taken over practical control of the management of the operation and security of the pipeline and facilities from SPDC, or to have exercised joint control with SPDC, it is well arguable that RDS would likewise be in a relationship of proximity with the claimants”. Whilst this was an issue to be determined at trial, Sales LJ considered that the management structure of RDS and its Executive Committee indicated that the claimants did have an arguable case.

After the Court of Appeal had reached its decision in Okpabi, the Supreme Court gave judgment in Lungowe v Vedanta Resources plc [2019] UKSC 20 which also considered the tortious liability of an English parent company for the activities of a foreign subsidiary in the context of a copper mine in Zambia. Lord Briggs JSC gave the judgment of the court in Vedanta, stating (at paragraph 44) that the existence of a duty owed to the claimants by the parent company was dependent on the level of its intervention in the activity of its subsidiary. The Supreme Court also rejected the argument that a parent company’s liability for the activities of its subsidiary was a novel category of tortious liability (at paragraph 50), so the three-stage Caparo test would not apply.

Delivering the Supreme Court’s judgment, Lord Hamblen stressed the importance of courts not conducting mini-trials in the context of jurisdictional applications, with reference to Three Rivers District Council v Bank of England (No 3) [2003] 2 AC 1. Noting the significant volume of evidence filed in relation to the application, which had also attracted criticisms from Fraser J and the Court of Appeal, Lord Hamblen stated that the filing of so much evidence can lead a court to evaluate and make a decision based on that evidence, which is not the role it should perform in this context. Unless allegations of fact are “demonstrably untrue or unsupportable, it is generally not appropriate for a defendant to dispute the facts alleged through evidence of its own”. Subject to that, it was only necessary for the court to determine whether the pleaded case establishes a real issue to be tried.

With that in mind, the Supreme Court allowed the appeal on the basis that a duty of care arguably could arise as a result of RDS taking over the management or joint management of the relevant activities of SPDC and/or RDS promulgating group-wide safety/environmental policies and taking active steps to ensure implementation by SPDC, reflecting two of the four routes to formation of a duty as set out by the Supreme Court in Vedanta.

As noted by Sales LJ in the Court of Appeal, Lord Hamblen also recognised the significance of the organisational structure of RDS. While formal and binding decisions were taken at corporate level, those decisions would generally be taken on the basis of prior advice and consent from the vertically-arranged business and function lines, the heads of which sit on the Executive Committee or report to the CEO. The claimants assert that this vertical structure is comparable with the example given by Lord Briggs in Vedanta of a group of businesses which “are, in management terms, carried on as if they were a single commercial undertaking, with boundaries of legal personality and ownership within the group becoming irrelevant”. In such situations, a parent company could be liable to those affected by the actions of its subsidiary.

While much of the commentary on the Okpabi case has focused on the procedural and corporate liability aspects of the claim, the case (in combination with Vedanta) also raises management liability issues which will be of interest to parent company directors and their insurers. Where group structures may have been expected to protect parent companies (and by extension their directors) from potential liability for the activities of subsidiaries, in the absence of such protection it will be necessary for parent company directors to give close consideration to the extent to which group structure, policy and procedure might generate personal exposure, especially where parent companies of multinational groups may wish to be seen as more engaged in the activities of their subsidiaries for commercial or reputational reasons.