Case Update: UK Parent Company Liability
September 9, 2019
The UK Supreme Court ruled that a UK parent company could be liable for the operations of its overseas subsidiaries and that overseas claimants may be allowed to bring claims against UK parent companies through the English courts.
On 10th April 2019, the UK Supreme Court (UKSC) handed down its judgment in Vedanta Resources PLC and another v Lungowe and others, ruling that a UK parent company could be liable for the operations of its overseas subsidiaries and that overseas claimants may be allowed to bring claims against UK parent companies through the English courts.
For multi-national companies headquartered in the UK, the case is significant and highlights the risks associated with class-action claims brought by foreign claimants in the UK, including what factors may go against a UK parent company when defending against a cross-border claim.
- The case concerned an environmental group claim brought by 1,826 Zambian villagers (Claimants) against a Zambian company, ‘Konkola Copper Mine’ (KCM). Vedanta Resources plc (Vedanta) is the ultimate parent company of KCM which is incorporated and domiciled in the UK.
- The Claimants alleged that KCM and Vedanta had acted negligently in permitting a nearby copper mine owned and operated by KCM to leak toxic waste into nearby waterways used for drinking water and crop irrigation, which resulted in personal injury and damage to their farming activities.
- The Claimants argued that Vedanta owed a duty of care to the Claimants due to the level of managerial intervention that it had in the operations of KCM, despite KCM being a separate overseas subsidiary with its own local management team.
UKSC concluded that it was at least arguable that Vedanta had sufficiently intervened in KCM’s operations to give rise to a duty of care, thereby permitted the case to proceed through the English courts.
UKSC identified various factors in reaching its decision, including the setting of environmental standards across the group and overseeing the standards of training, monitoring and enforcement in KCM’s operations at the mine.
UKSC also agreed with the approach of the Court of Appeal in considering access to justice issues in Zambia, including the lack of legal aid available to the claimants in Zambia or alternative funding arrangements (e.g. “no win no fee”), and the complexity of the litigation.
The extreme poverty of the claimants meant that, in the UKSC’s view, it would be impossible for the claimants to collectively bring such a large claim in Zambia, especially compared to the extensive resources available to KCM to defend the claim.
For UK companies operating through overseas subsidiaries, the case highlights the potential risk of being found to be liable in the English courts for acts taking place abroad.
Accordingly, UK parent companies must take care when taking direct responsibility over the implementation of group-wide policies.
Although the case has not yet been decided at trial, UK-domiciled parent companies should consider the following steps to reduce its legal exposure to the operations of their foreign-based subsidiaries:
- Taking care when issuing public statements or reports and not assuming responsibility over group-wide standards.
- Ensuring that the management team of overseas subsidiaries are responsible for implementing policies, guidelines, systems of management and training of staff.
- Ensuring that management decisions are independent and not directed through the parent company.
Taking a careful approach in setting group-wide standards to ensure a degree of separation between the management of UK parent companies and the day-to-day operations of overseas subsidiaries, should be a key concern for UK directors moving forward.
Following the decision of UKSC on the question of procedure; the substantive claims of the Zambian villagers will be heard by the UK High Court at a later date.