Are parent companies liable for ESG claims against their foreign subsidiaries?
Upcoming EU due diligence regulation is seen as a game-changer for ESG lawsuits outside the overseas jurisdiction in which the alleged offences took place, but such cases are already being heard in UK courts.
Although the EU Corporate Sustainability Due Diligence Directive is yet to be finalised, its potential impact on corporate litigation is already being tested in court.
In recent years, a number of corporate claims — seeking compensation for environmental damages or human rights violations allegedly committed through companies’ overseas subsidiaries — have been accepted to be heard in front of western courts.
One such case, targeting mining conglomerate Vedanta Resources, set an important precedent in English courts. In 2019, the Supreme Court stated that it was “arguable” for the UK-domiciled parent company to owe a duty of care to the Zambian claimants, who were seeking compensation after their farmland suffered environmental damage from a copper mine owned by Vedanta subsidiary Konkola Copper Mines. The case was subsequently settled, and the parties avoided a trial.
“The courts of England and Wales are receptive to such claims, and it is likely that such litigation will continue to be housed here,” says Katie Byrne, partner at law firm Irwin Mitchell. She notes that claimants may prefer to pursue a claim in a jurisdiction where legal systems are more efficient and higher levels of compensation are possible, in order to access appropriate justice.
Moreover, environmental, social and governance statements and promises made by corporations have created potential avenues for litigation if a failure somewhere in an organisation’s supply chain has occurred, says Matthew Banham, partner in law firm Dechert’s white collar practice.
A duty of care
As ESG issues have moved to the forefront over the past decade, it is only natural for the courts and the law to be asked to consider, adapt to and align with the changing norms and challenges that society faces, Banham adds.
This also includes the discussion on whether or not a duty of care may be owed or assumed by a parent company to individuals who are negatively impacted by the operations of an overseas subsidiary.
Although England and Wales are very much a hotspot for these types of claims at present, there is no automatic right to pursue parent companies for the acts of their subsidiaries, says Sarah Crowther, partner at law firm DAC Beachcroft. “A duty of care on the part of the parent company must be established for a claim to be brought against a parent company domiciled in England and Wales, which will be decided on a case-by-case basis and is dependent on the facts at hand,” she explains.
Businesses have a number of different obligations in relation to whom they owe a duty of care. This may include employees, shareholders and the general public. However, this is all conditional on corporate structure and governance, says Byrne.
A duty of care on the part of the parent company must be established for a claim to be brought against a parent company domiciled in England and Wales
Sarah Crowther, DAC Beachcroft
Foreseeability, proximity and whether it is “fair, just and reasonable” to impose a liability for a breach of duty are the legal foundations on which courts need to assess if a duty of care exists between a defendant and a claimant, she adds.
Relevant factors to consider include the degree to which a parent company exercises supervision and control over its subsidiaries or over a third party such as a police force, says Julianne Hughes-Jennett, partner at law firm Quinn Emanuel. She cautions, however, that these are fairly novel arguments the courts are dealing with and are very case and fact specific.
Still, the traditional concept of a “duty of care” has already evolved, notes Banham. “Publicly disclosed ESG statements and fiduciary duties are providing the grounds for third-party claimants to argue that organisations owe them certain standards, actions and care as published in corporate ESG commitments and through the operation of the organisation’s global policies and procedures that seek to address ESG issues,” he says.
Moving an ESG claim to a different jurisdiction
Although assessing whether a duty of care exists between a parent company and a claimant is a first and necessary step, claimants need to have a strong case for litigating against a parent company in its home jurisdiction, rather than against the company’s subsidiary.
This may include factors such as whether substantial justice is available in the jurisdiction in which the subsidiary is operating, or if there are legal teams in the jurisdiction with the experience to run complex litigation, says Crowther. Political instability is another consideration, although that of itself would not be enough to justify the litigation being heard in the UK, she adds.
Political instability might be instrumental in a claimant seeking to litigate in a different jurisdiction; however, there would need to be a link to the proposed jurisdiction by virtue of the parent company being situated there or a contractual link that enables a choice of law, agrees Byrne.
She adds that in looking to litigate against a parent company over a subsidiary company, claimants would consider that parent companies tend to have deeper pockets, better levels of insurance behind them, a larger pool of shareholders to be accountable to, and greater reputations at stake. She also notes that in the UK, costs shifting rules are in place — whereby a losing claimant does not have to pay the defendant’s costs in cases of personal injury — and that it is often easier to enforce an English law judgment.
Banham agrees that claimants will want to commence proceedings in jurisdictions most advantageous to their case, which include factors such as the approach taken to damages, the scope of disclosure and the availability, if relevant, of litigation funding. He adds that claimants will usually have options, such as the default position in some international conventions that a defendant should be sued in the country in which they are domiciled.
Existing cases and regulation
Despite the EU due diligence directive still being debated across EU institutions, a few countries have already implemented national legislation targeting supply chain responsibilities. These include France’s Duty of Vigilance Law of 2017, German’s Supply Chain Due Diligence Act in force from this year, and Norway’s Transparency Act from 2022.
France has seen a few cases — notably involving consumer giant Danone, banking group BNP Paribas and energy conglomerate TotalEnergies — being brought to court based on the law’s supply chain requirements. The lawsuit against TotalEnergies, where six non-governmental organisations sued the company over environmental and social concerns related to a $10bn oil project across Uganda and Tanzania, was recently dismissed by the Paris tribunal on procedural grounds.
Unlike the French law, the German act does not allow for civil liability to be pursued in court. Nonetheless, German courts have been willing to hear claims related to adverse environmental and climate-related impacts involving German subsidiary operations.
Banham points to the lawsuit targeting German energy group RWE, in which the company has been requested to pay for adaptation costs to prevent flooding in an area in Peru where the group operates. The Peruvian farmer who filed the claim argues that RWE, as a major emitter of greenhouse gases, is responsible for the environmental risks incurred on location. “The case remains ongoing, but if the claimant is successful, this case would set a significant precedent that a company could potentially be held liable for its greenhouse gas emissions and contributions to global climate change,” he says.
It is likely that for supply chain due diligence claims companies will be required to defend themselves where the breach of legislation occurred, rather than where the actual breach took place
Katie Byrne, Irwin Mitchell
Experts agree that supply chain due diligence legislation, such as the EU directive, will further stimulate and encourage parent company liability claims in western jurisdictions.
“It will be factually specific as to where any litigation takes place, considering all the circumstances of the case. However, it is likely that for supply chain due diligence claims companies will be required to defend themselves where the breach of legislation occurred, rather than where the actual breach took place,” says Byrne.
Companies will have to be prepared to defend themselves in the jurisdictions in which they are based or in which the damage has occurred, and occasionally in both jurisdictions, notes Banham.
Crowther also points out that by making a parent company accountable for its entire supply chain, it may overcome the duty of care hurdle automatically. Her colleague at DAC Beachcroft, disputes partner Simon Konsta, adds that parent company liability is another stepping stone towards better overarching governance, “where businesses can continue to create value but without harming our environment or our future”.
Outlook
If the EU directive is adopted, it is conceivable that the UK may follow suit, says Byrne. She considers this type of regulation as a game-changer, since any increase in reporting obligation is likely to result in more litigation. “Suddenly, what you have always done is now not the right way to do things and as a result can expose you to risk,” she says.
Industries that are directly connected to the environment and which provoke public sentiment are most at risk of being exposed to parent company liability claims, according to Crowther.
Experts agree that energy and mining are particularly vulnerable, but that cases could spread outside these industries too. Crowther and Banham both cite transport and agriculture as potential targets for this type of ESG litigation, while Hughes-Jennett also notes telecoms as a vulnerable industry. Furthermore, waste, plastics, textile and manufacturing are also flagged as potential sectors at risk of parent liability claims.
As most cases are currently going through the courts or being appealed, it is hard to rate claimants’ success rate so far. However, settlements — such as in the case of Vedanta in the UK — might often provide an easier and more direct way out for both parties.
Reputational damage is one important reason to settle claims rather than going to trial, argues Byrne. “It is perceived far better to settle a claim without the need for a formal trial and to conclude litigation on terms you are happy with, as opposed to terms enforced upon you by a court, and in such a way that the terms of the settlement will remain confidential. It further negates the opportunity for bad press to be written as a result of what might be said in court during any hearing,” she says.
One case that went on full trial in the UK, and in which the claimants were unsuccessful, involved iron ore miner African Minerals. The company, headquartered in London before filing for bankruptcy in 2015, was accused of being responsible for human rights violations in its operations in Sierra Leone. In August 2020, the UK Supreme Court ruled that the company could not be held liable for the violations inflicted by a third party, in this case the local police force.
A highly awaited case is the lawsuit against mining giant BHP, set for trial in April 2024 in UK courts, where approximately 700,000 claimants are seeking compensation for damages caused by the collapse of the Fundão tailings dam in Brazil in 2015, which killed 19 people. If the trial goes ahead — BHP has launched an appeal to the Supreme Court — it would be the UK’s largest opt-in class action lawsuit to date.
It is noteworthy to mention that jurisdictions such as England and the Netherlands have accepted parent liability claims despite supply chain due diligence laws not domestically in force. This shows the courts’ willingness to increasingly accept jurisdiction over subsidiaries’ alleged offences in often higher-risk overseas locations, based on existing laws and regulatory frameworks.
Moreover, experts warn about the risks for companies, as well as governments, to be held legally responsible from failure to implement ESG commitments they made to the wider public. As the field of ESG litigation continues to expand, companies, especially those operating in higher-risk industries or territories, will need to do their homework to avert heavy scrutiny by regulators and civil society.