Removing straitjackets, and widening the potential scope of parent company liability for a subsidiary’s actions
Can the parent company of a multinational group owe a duty of care to a third party for the actions of a foreign operating subsidiary? There remains no definitive answer at the time of writing. However, the UK Supreme Court (“UKSC”) recently found that, in certain circumstances, it would be reasonable for UK courts to determine the question at trial.
This post concerns the UKSC’s recent decision in Vedanta Resources PLC v Lungowe,[i] a group action under Part 19 of the UK’s Civil Procedure Rules.[ii] The decision ends a long jurisdictional challenge to the pursuit of a transnational tort claim in the UK. It matters in Canada because, at the time of writing, at least two transnational tort claims are before our courts too.[iii] While the decision in Vedanta is not binding in Canada, UK precedents, particularly decisions of the UK Supreme Court, continue to be well received and respected.[iv]
The group members are Zambians living in rural farming communities in Zambia. Vedanta is a UK corporation, and is the publicly traded parent of a multinational group. Through the group, Vedanta has interests in mineral and hydrocarbon production in four continents.[v] In Zambia, Vedanta has an interest in the Nchanga Copper Mine (“Nchanga”).
The Nchanga interest is held through Vedanta’s operating subsidiary, Konkola Copper Mines plc (“KCM”). KCM is not a 100% subsidiary of Vedanta. The Zambian government has a significant minority interest in it. Notwithstanding, Vedanta has published disclosure documents effectively stating that Vedanta’s ultimate control of KCM is not to be regarded as any less than complete.[vi]
The group sued Vedanta and KCM in 2015. They allege damage to their health and farming activities caused by repeated toxic discharges from Nchanga into the watercourses the group members use for drinking and irrigation. The claims against Vedanta and KCM include a claim in negligence. The essence of the group’s claim against Vedanta is that “it exercised a sufficiently high level of supervision and control of the activities [at Nchanga], with sufficient knowledge of the propensity of those activities to cause toxic escapes into surrounding watercourses, as to incur a duty of care to the group”.[vii]
To sue KCM in England, the plaintiffs were required to show a triable issue against Vedanta. Under the UK’s Civil Procedure Rules, if there was a triable issue, Vedanta could be treated as an “anchor defendant”, and a claim could be included against KCM as a necessary or proper party.[viii]
KCM and Vedanta brought applications challenging the jurisdiction of the UK courts to hear the claims. Vedanta argued that, on the group’s pleading and evidence, there was no triable issue, because it could not be shown Vedanta had done enough to give rise to a common law duty of care. It also argued that a finding that Vedanta had incurred a duty of care to the group would involve a novel and controversial extension of the boundaries of the tort of negligence, rather than an incremental extension by analogy with established categories. In 2016, the Queens Bench Technology and Construction Court (“TCC”) dismissed Vedanta’s and KCM’s challenges.[ix] They appealed. In 2017, the UK Court of Appeal upheld the entirety of the TCC’s order dismissing the jurisdictional challenges.[x]
The UKSC Vedanta decision appears to be the first, unanimous decision from a superior court of the Commonwealth to squarely consider the possibility of direct parent company liability to third parties affected by the activities of a foreign operating subsidiary.[xi] The decision confirms that the general principles that determine whether A owes a duty of care to C in respect of harmful activities of B are not novel, and date back to the decision of the House of Lords in Dorset Yacht Co Ltd v Home Office  AC 1004.[xii] Dorset Yacht was a case about the negligent supervision of prisoners, and its general principles have been endorsed and applied by Canadian courts in other contexts.[xiii]
Of note, the Court provided the following guidance:
- A parent company will only be found to be subject to a duty of care in relation to an activity of its subsidiary if ordinary, general principles of tort law regarding the imposition of a duty of care on the part of the parent in favour of a claimant are satisfied in the case;[xiv]
- Direct or indirect ownership by one company of all or a majority of the shares of another company (the irreducible essence of the parent/subsidiary relationship) may enable the parent to take control of the management of the operations of the subsidiary, but it does not impose any duty on the parent to do so. Everything depends on the extent to which, and the way in which, the parent took over, intervened in, controlled, supervised or advised the management of the relevant operations of the subsidiary;[xv]
- Courts should not try to create any specific categories or situations where a parent company might incur a duty of care to third parties harmed by the activities of the subsidiary. There is no limit to the models of management and control which may be put in place within a multinational group of companies. At one end, the parent may be no more than a passive investor in separate businesses carried out by its various direct and indirect subsidiaries. At the other extreme, the parent may, in management terms, carry on as if the group were a single commercial undertaking, with boundaries of legal personality and ownership within the group being irrelevant, until the onset of insolvency.[xvi]; and
- Even where group-wide policies do not of themselves give rise to a duty of care to third parties, they may do so if the parent does not merely proclaim them, but takes active steps, by training, supervision and enforcement, to see that they are implemented by relevant subsidiaries. Similarly, the parent may incur the relevant responsibility to third parties if, in published materials, it holds itself out as, or asserts its own assumption of responsibility for, exercising that degree of supervision and control of its subsidiaries, even if it does not in fact do so. In such circumstances, omission may constitute an abdication of a responsibility which it has publicly undertaken.[xvii]
[i]  UKSC 20 (10 April 2019) (“Vedanta UKSC”).
[ii] Online at: https://www.justice.gov.uk/courts/procedure-rules/civil/rules/part19.
[iii] Choc v Hudbay Minerals Inc., and Araya v Nevsun Resources Ltd.
[iv] See, for examples: Office of the Children’s Lawyer v. Balev,  1 SCR 398, at para 46; Deloitte & Touche v. Livent Inc. (Receiver of),  2 SCR 855, at paras 104 and 136;
[v] Vedanta UKSC, note i, at paras 1-2.
[vi] Vedanta UKSC, note i, at paras 1-2.
[vii] Vedanta UKSC, note i, at para 55.
[viii] The ‘necessary or proper party’ gateway of the UK Civil Procedure Rules is in Part 6, Practice Direction 6B, para 3.1.
[ix] Lungowe & Ors v Vedanta Resources Plc & Anor  EWHC 975 (TCC) (27 May 2016).
[x] Lungowe & Ors v Vedanta Resources Plc & Anor  EWCA Civ 1528 (CA) (13 October 2017).
[xi] New Zealand recently came close in James Hardie Industries Plc v White. The issue was when a parent company may be liable for defective products made, marketed and sold by a foreign subsidiary company. See  NZCA 580 [13 December 2018], leave to appeal to the Supreme Court of New Zealand was dismissed, see  NZSC 39 [16 April 2019].
[xii] Vedanta UKSC, note i, at para 54.
[xiii] See, for example: Kamloops (City of) v. Nielsen,  2 S.C.R. 2. In Kamloops, a contractor built a house for his father (B), who sat on the municipal council of the City of Kamloops. The contractor son failed to comply with certain foundation building requirements. When inspected by the City, a stop work order was placed on further construction of the house. Remedial plans were made by the son but not followed. He continued to build based on the old, deficient plans, and did so notwithstanding the stop work order. B purchased the house and encouraged the City to take no further action. B later sold the house to the Nielsens (C), without informing them of the stop work order for the deficiency. A year later, C found the defect and sued B and the City (A). At trial, both A and B were found liable (25:75); and see also, for example, Jane Doe v Metropolitan Toronto Commissioners of Police,  39 OR (3d) 487. In Metropolitan Toronto, a serial rapist (B) was at large and preying on women in Toronto. He intruded their homes via balconies. The police (C) did not warn women in the area of the rapist, because they thought it would cause panic in the area. Jane Doe (A) lived in the area and was raped at knifepoint by the rapist. The decision not to warn potential victims prevented them from taking reasonable precautionary measures. The court found that A established herself as part of a distinct, identifiable class at risk of attack, and C owed her a duty of care in the circumstances.
[xiv] Vedanta UKSC, note i, at para 50, citing with approval Sales LJ in AAA v Unilever plc  EWCA Civ 1532, para 36.
[xv] Vedanta UKSC, note i, para 49.
[xvi] Vedanta UKSC, note i at para 51.
[xvii] Vedanta UKSC, note i at para 53.