Holding the Parent Company Liable for Human Rights Abuses Committed Abroad: The Case of the Four Nigerian Farmers and Milieudefensie v. Shell

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On 29 January, The Hague Court of Appeals delivered a groundbreaking judgment on three separate lawsuits brought by four Nigerian farmers concerning large-scale oil spillage in three villages, in Oruma, Goi and Ikot Ada Udo, in Niger Delta, which rendered the claimants’ farmlands and fishponds unusable. The lawsuits were brought both against the parent company, Royal Dutch Shell (RDS), headquartered in The Hague, Netherlands, and its Nigerian subsidiary, Shell Petroleum Development Company (SPDC).

Concerning the claim brought against the parent company, the claimants argued that RDS failed to take due care to prevent and mitigate the oil spill by its subsidiary company, SPDC, in Nigeria. In other words, the plaintiffs alleged that RDS breached the duty of care owed to them and claimed compensation to the damage caused due to the oil spillage. So, one of the issues addressed in the judgment is whether RDS owed a duty of care to victims of its subsidiary company, SPDC. By relying on Chandler v. Cape plc and Lungowe v Vedanta, the court decided that RDS owed a duty of care to the victims affected by the Oil spill.

The judgment is historic as it is for the first time a parent company has been found to be liable for breach of duty of care regarding abuses committed abroad by its foreign subsidiary company. By focusing on this issue, I will discuss what this judgment would mean in improving the ability of victims, particularly those who are affected by the operation of subsidiary companies in developing countries, to seek and obtain remedy from the parent company in home states. The factual background and some important points of the case are discussed in detail here.

Overcoming the Barrier of the Principle of Limited Liability

There are various reasons why victims of human rights abuses often tend to sue parent companies instead of or in addition to subsidiary companies, which directly cause or commit human rights abuses and environmental impacts. First, subsidiary companies might be unable to fully compensate the abuse or the harm they caused. This could happen when the subsidiary company has insufficient assets or if it became bankrupt or ceased to exist. Second, even if the subsidiary companies have sufficient funds, the legal system in host states could be ineffective to seek and obtain remedy from subsidiary companies. In search of an appropriate forum, victims often sue parent companies in their home states, which are often developed states with an efficient legal system.

However, victims’ actions against parent companies has always been met with a legal challenge based on the principle of limited liability. According to the principle of limited liability, a corporate law principle recognised in almost all states, parent companies cannot be held liable for abuses committed by their subsidiary companies, even if they are the sole owners of the shares of their respective subsidiary companies. Indeed, the application of limited liability aims to encourage expansion of economic activities by protecting parent companies from liability. However, it limits the ability of victims to seek and obtain redress from parent companies for abuses committed by their subsidiary companies.

The way in which the principle of limited liability poses barrier in ensuring corporate accountability and remedy has been noted by various UN treaty bodies. The Committee on ICESCR, for instance, stated that ‘[b]ecause of how corporate groups are organized, business entities routinely escape liability by hiding behind the so-called corporate veil, as the parent company seeks to avoid liability for the acts of the subsidiary even when it would have been in a position to influence its conduct’(General Comment no 24, para.42). Similarly, the Committee on the Right of the Child noted that ‘the way in which transnational corporations are structured in separate entities can make identification and attribution of legal responsibility to each unit challenging’ (General Comment no. 16, para.67).

This explains why home states of corporations are often urged to ensure corporate accountability and the provision of remedy by establishing parent company or group liability regimes. In recent years, there are various legislative and judicial developments which have had the purpose and/or the effect of overcoming this barrier. Notable in this regard is the adoption of French law on duty of vigilance, which allows victims to hold French based parent companies liable for abuses committed by their subsidiary companies if it is caused due to breach of the duty of vigilance. In common law jurisdictions, such as the UK and Canada, victims who seek to hold parent companies liable circumvent the barrier of limited liability by bringing their claims based on breach of the duty of care.

However, none of the cases brought based on the duty of care of the parent companies has resulted in decision on the merit. While some of cases settled before trial or struck out for various other reasons, some others such as Lungowe v Vedanta and Choc v Hudbay Minerals, are still being litigated in English and Canadian Courts, respectively. This makes the Milieudefensie v. Shell the first case in which a parent company is held liable for the breach for duty of care for foreign claimants.

 The Duty of Care of the Royal Dutch Shell

In determining whether RDS owed a duty of care, the court applies Nigerian common law, the law of a state in which a damage occurred, in which English precedent has a persuasive authority. Under English common law parent companies owe a duty of care to victims of their subsidiary companies if it exercises sufficient level of control over the activities of its subsidiary companies. The circumstances under which parent companies owe duty of care under English common law is clarified in Chandler v. Cape plc and recently in Vedanta v. Lungowe and Okpabi v. Royal Dutch Shell

The Hague Court of Appeals noted that the existence of duty of care depends on the threefold Caparo test: foreseeability of the harm, proximity between parties and reasonableness to impose the duty of care (Caparo Industries plc v Dickman and others). However, it is worth noting that the UK Supreme court recently indicated that employing the Caparo test to determine the existence of the duty of care is not a correct approach, as ‘the liability of parent companies in relation to the activities of their subsidiaries is not, of itself, a distinct category of liability in common law negligence’ (Lungowe v Vedanta para.49 Okpabi v. Royal Dutch Shell para. 25). The duty of care of parent companies ‘depends on the extent to which, and the way in which, the parent availed itself of the opportunity to take over, intervene in, control, supervise or advise the management of the relevant operations (including land use) of the subsidiary’ (Ibid).

Be that as it may, regarding the oil spill, the court decided that RDS cannot be considered to owe a duty of care, since it was caused by sabotage, not by the fault of its Nigerian subsidiary, SPDC. (para.5.31). Then regarding the failure to install LDS (Leak detection system) in Oruma, the court assessed whether RDS owed a duty of care to ensure that an LDS was installed in the Oruma pipeline. The court noted that RDS sets policy and standards, advises, supervises, and is involved in the decision making of SPDC. It particularly considered the fact that since 2010 RDS was actively involved in a decision whether oil pipelines in Nigeria should be provided with LDS. By relying on these facts, the court concluded that RDS knew that an LDS was lacking in Oruma at least since 2010, and it is fair and reasonable for RDS to assume a duty of care to ensure that LDS was installed in the Oruma pipeline (para. 7.26). Accordingly, RDS was found to have breached its duty of care by failing to ensure LDS was installed in Oruma.

Conclusion

Regardless of the approach employed in the assessment of the duty of care, the decision will likely inspire more victims to rely on the duty of care and seek redress from parent companies for environmental and human rights abuses committed by subsidiary companies. By recognising and enforcing parent companies’ duty of care, states, particularly common law jurisdictions, can enable victims to circumvent the principle of limited liability and claim redress from parent companies. This does not mean that duty of care is the best approach to overcoming the barrier of limited liability and improving corporate accountability. As the duty of care of parent companies hinges on factual control, they can easily escape liability by maintaining a separate relationship with their subsidiary companies.

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Lucas Roorda says

February 19, 2021

Great blog! Good to see this case get attention on EJIL Talk! as well, it's a groundbreaking judgment even if it is somewhat flawed, and even if the common law duty of care approach may not be the best approach in the long term, as you pointed out. As I wrote in my own take on the judgment (https://corporate-responsibility.org/shell-court-short-comparison-okpabi-milieudefensie-judgments/ and https://rightsasusual.com/?p=1388), the Court actually got the English precedent wrong. Not only is the Caparo test the wrong test (as the UKSC said in Vedanta, and confirmed last week in the Okpabi judgment) to apply, the Dutch Court also adds a strange condition that in order for the parent to have incurred a duty of care, the subsidiary must have itself acted wrongfully. In this case, because liability was based on strict liability under the OPA 1956, the Court ruled that there could be no duty of care with regard to the 'causation' aspect of the claims. This however does not follow from the English precedent at all, neither Caparo, nor Chandler or Vedanta. I'd love to hear your comments on that!