Case law update
A parent company and its subsidiary are separate in the eyes of the law, with separate legal liability for their acts and omissions. However, if a parent company is too closely involved in the affairs of its subsidiary, it risks owing a direct duty of care to the employees of, and third parties affected by, the subsidiary.
The Court of Appeal’s decision at the start of this month in AAA & Others v Unilever plc and Unilever Tea Kenya Limited [2018] is the third in a string of recent decisions where claimants have sought to pursue parent companies for the transgressions of their subsidiaries – the others being Lungowe and others v Vedanta Resources plc & Konkola Copper Mines plc [2017] and Okpabi and others v Royal Dutch Shell plc and another [2018]. Reassuringly, the Court has affirmed that a parent company can impose group-wide high-level standards and policies, and seek assurance from its subsidiaries that those standards and policies are being complied with, without assuming a duty of care. A parent can also provide high-level, non-specific advice on risk management, provided that advice is not prescriptive.
Of course, there remains the question – not yet considered by the courts – of how a parent company should respond if the assurance sought from a subsidiary in fact flags potential issues. In that instance, the parent company should be cautious in deciding how to direct its subsidiary to rectify the issue, and would be wise to limit direction to a request for an explanation of how it will respond to the issue. This is because a prescriptive, top-down approach may well result in the parent adopting a duty of care which otherwise would not have existed. However, in practice this will need to be balanced with the risk of harm – to life, reputation, the bottom line, or otherwise – if an issue is not rectified swiftly.
AAA v Unilever plc and Unilever Tea Kenya Limited – the facts
In December 2007, violence broke out across Kenya following the announcement of the Kenyan presidential election results. A tea plantation owned and operated by Unilever Tea Kenya Limited (UTKL) in Kenya's Rift Valley was invaded by ‘criminal rioters’ during the violence.
The claimants – 218 Kenyan nationals who were employed by UTKL or otherwise lived on the plantation – had suffered rape, personal injuries, and damage to property when the plantation was invaded. Seven of the claimants had been killed.
The claimants brought a negligence claim in the English courts against UTKL and its UK parent company, Unilever plc, for failing to ‘protect them against a foreseeable risk of attack.’ For this claim to succeed, the claimants needed to show, among other things, that Unilever plc owed them a ‘duty of care’.
The High Court’s decision
In February 2017, the High Court found that a duty of care had not arisen, because two of the three criteria required to establish such a duty had not been met:
- While some post-election violence was foreseeable, it was ‘inconceivable’ that a parent company ‘based thousands of miles away’ should have foreseen the damage which occurred to the claimants following the election when ‘nothing remotely comparable had ever happened before’ on the plantation.
- It was not fair, just or reasonable to impose a duty of care which required Unilever plc to ‘act as a surrogate police force to maintain law and order.’
However – crucially to this line of case law – the Court did find that, on the material it had been shown, Unilever plc appeared to have played an active role in managing UTKL's affairs and to have assumed apparent control of its safety and risk procedures. As such, it was theoretically sufficiently proximate to UTKL’s actions to owe a duty of care to the claimants – although the question ultimately did not arise for the reasons given at (1) and (2) above.
The Court of Appeal’s view
The Court of Appeal upheld the decision that Unilever plc owed no duty of care to the claimants, but took the opposite view on proximity. They considered that a parent company may have sufficient proximity to its subsidiary to owe a duty of care to those affected by the actions of that subsidiary in the following two scenarios:
- Where the parent company has solely or jointly taken over the management of the relevant activity of the subsidiary (as argued recently in Lungowe v Vedanta and Okpabi v Shell).
- Where the parent company has given relevant advice to the subsidiary about how it should manage a particular risk.
It was agreed that this case did not fall within the first scenario. The Court noted that ‘the management of the affairs of UTKL was conducted by the management of UTKL’ and, further, quoting a passage from Okpabi v Shell, a ‘corporate structure itself tends to militate against the requisite proximity’ between a parent company and the employees of, and those affected by, a subsidiary.
Instead, the claimants argued that their claim fell within the second scenario and relied on evidence of advice given by Unilever plc to UTKL as to how to manage the risk of political violence. The Court of Appeal decided however that this advice was ‘very general’ and ‘not directed to giving the management of UTKL any precise information, let alone instructions.’
The Court of Appeal therefore decided that Unilever plc was not sufficiently proximate to UTKL to owe a duty of care to the claimants.
Practical points
Parent companies attempting to minimise their risk of liability for a subsidiary’s actions should note the following key points which assisted the Court of Appeal to find that Unilever plc was insufficiently proximate to UTKL to assume a duty of care:
- UTKL genuinely managed its own business.
- UTKL had prepared and carried out its own crisis management training programme, with no specific direction or advice from Unilever plc.
- Although Unilever plc had central policies in place (including a Corporate Risk Management policy and a Crisis Prevention and Response Policy), these did not override UTKL’s autonomy and authority over its own operation.
- UTKL could show it had, in compliance with the group’s risk management assurance procedures, provided assurance to the appropriate management level within the group that UTKL had an appropriate risk management policy in place.
Where next for the law on parent company liability?
The recent cases on parent company liability are particularly helpful because they examine the nuanced challenges facing complex businesses which must balance the advantages of operating (or requirements of the local jurisdiction to operate) via subsidiaries with the need to implement policies to maintain a uniformly positive and cohesive group identity in an environment where consumers are increasingly influenced by a company’s image.
However, there remains some uncertainty here as none of the recent cases have yet gone to a full trial (they have all related to interim applications) and we have yet to see any Supreme Court guidance on this area of law. Lungowe v Vedanta should change that, as the defendants were granted permission in March 2018 to appeal to the Supreme Court.
How can Burges Salmon help?
The law on parent company liability is particularly relevant in the context of health and safety and environmental incidents; the substantial damages potentially available to claimants can make it attractive to pursue a wealthier parent company. Further, in respect of subsidiaries in the UK, there is a risk that a parent company exposes itself to corporate manslaughter charges.
Where foreign subsidiaries are involved, claimants can for a variety of reasons prefer to litigate in the English courts rather those in the subsidiary's jurisdiction – particularly if the alternative is seen to be unstable or corrupt.
Burges Salmon has extensive experience advising both parent companies and subsidiaries at home and abroad in these sectors. Should you wish to discuss any of this further, please contact us.