Parental responsibility: why directors may have to consider other group companies
The Court of Appeal has recently considered whether English proceedings can properly be commenced against a defendant outside the jurisdiction.
The Court of Appeal has recently considered whether English proceedings can properly be commenced against a defendant outside the jurisdiction. Although the court’s decision in Lungowe and others v Vedanta Resources Plc and another addressed a question of legal process, it reminds observers that an English parent company may in certain circumstances owe a duty of care to the employees of an overseas subsidiary. It suggests further that such a duty may be owed more widely, to non-employees who may be affected by the subsidiary’s actions.
Konkola Copper Mines Plc (KCM) is a public limited company incorporated in the Republic of Zambia and the owner of a copper mine. KCM is a subsidiary of Vedanta Resources Plc (Vedanta), an English company. The many claimants were Zambian citizens, who claimed that they had suffered as a result of pollution and environmental damage caused by KCM’s mining operations.
The claimants had commenced proceedings against both Vedanta and KCM. It had been observed in the High Court previously that the claimants would struggle to get effective access to justice by bringing proceedings solely against KCM, in Zambia.
In the High Court, Vedanta and KCM had challenged the jurisdiction of the English courts to hear the proceedings. The High Court dismissed the challenge, and the Court of Appeal upheld the High Court’s judgment. There was a complex issue of law to be decided in this case, namely whether Vedanta, as a parent company, could be liable for the actions of its foreign subsidiary. The existence of this issue justified the court’s decision.
The jurisdictional question
In an earlier case heard by the European Court of Justice (ECJ), Owusu v Jackson, the ECJ had held that, under the Brussels Convention, the English court was obliged to hear a case where the defendant was domiciled here, notwithstanding that the court of another, non-EU, state was a more appropriate venue. Here, the defendant in question was Vedanta.
Under the Civil Procedure Rules 1998, Practice Direction 6B, English proceedings may be commenced against an overseas defendant in certain circumstances, including where there is a good arguable case that the claim is covered by a “gateway” in paragraph 3.1. The most pertinent “gateway” here was that:
- A claim had been made against the (English) defendant, Vedanta;
- There was a real issue between the claimants and Vedanta which it was reasonable for the court to try (this issue is discussed below); and
- The claimant wished to commence English proceedings against another person who was a “necessary or proper party” to the claim (namely, KCM).
The legal question
As noted above, the Court of Appeal’s decision related to the jurisdictional question only, but in reaching this decision it fell to the court to consider the legal grounds on which a claim could rely. Accordingly, as discussed further below, the court considered how the English law of negligence could apply in the case against Vedanta.
Under English law, to be liable in negligence:
- The defendant must owe a duty of care to the claimant – in other words, it must be recognised in law that the careless infliction of damage by the defendant on the claimant should be actionable;
- The defendant must, by its actions, have breached this duty of care, in the sense that it has not lived up to the standard expected of it by the law;
- The defendant’s actions must have caused the damage which is subject of the claim. In some (but not all) circumstances, for example, it may be sufficient for a claimant to show that, but for the actions of the defendant, the damage would not have occurred; and
- The type of damage that the claimant has suffered must have been foreseeable.
What did the Court of Appeal decide?
Under the Owusu principle, the effect of Article 4 of the Recast Brussels Regulation (a successor to the Brussels Convention) was that the English courts could not decline jurisdiction to hear the case against Vedanta, an English-domiciled defendant. Further:
- There was a “real issue” of law between the claimants and Vedanta; and
- KCM was a “necessary or proper” party to the action against Vedanta.
The parties had agreed that the outcome of the case, when heard, would be decided by applying the Zambian law of negligence. The question arose as to whether, as under the English law of negligence, the claimants had an arguable case under Zambian law. In the light of differing opinions on whether a duty of care would be applied in Zambia, Lord Justice Simon decided that there was a real issue of Zambian law to decide.
There are precedents (Chandler v Cape plc  EWCA Civ 525; Thompson v The Renwick Group Plc  EWCA Civ 635) in English law for the proposition that a parent company may owe a duty of care to the employees of a subsidiary, where for example:
- In view of its superior knowledge about the nature and management of particular risks (such as risks posed by asbestos), it has assumed responsibility for the implementation by the subsidiary of health and safety measures; or
- It effectively controlled the operations which gave rise to the claim.
The principles that these cases raised could be applied to establish a duty of care owed more widely to non-employees affected by the subsidiary’s activities.
What does this mean for me?
Although the legal issues in the Vedanta case have yet to be argued, the court’s decision serves as a useful reminder of the risks that a parent company may run if it exercises a significant influence over the activities of its subsidiary companies.
Case law has so far considered the impact of a parent company’s actions on the employees of other group companies, but it was acknowledged by the Court of Appeal that non-employees may, in the right circumstances, also be able to claim against a parent company if its role in a subsidiary’s affairs has contributed to the damage suffered.
In group situations it is often unavoidable, in the interests of administrative ease, costs saving and group-wide consistency of approach, or because the parent company possesses particular knowledge and expertise on which other group members rely, that a parent company will take decisions which determine the fate of other group companies.
In keeping with their duties under section 172 Companies Act 2006, it is important in these circumstances for the company’s directors to have due regard not simply to the needs of the company and its employment and trading relationships, but to other matters such as the possible effects of its decisions on the community and the environment and the desirability of maintaining high standards of business conduct.
The outcome of the next stages of this case will be of interest to corporate groups, in particular those which operate internationally and which may face environmental, health and safety and human rights challenges.
If you a director of a group company and you wish to know more about your responsibilities in that capacity, please speak to your usual Weightmans contact in the first instance.