UK Parent Company Liability For The Acts Or Omissions Of Its Foreign Subsidiary - Corporate and Company Law

Introduction

In AAA & Others v Unilever PLC and Unilever Tea Kenya Limited, the Court of Appeal recently confirmed the first instance decision that a UK parent company was not liable for the acts or omissions of its foreign subsidiary ("Unilever").

Increasing attempts to bring claims against UK parent companies

Unilever is the third Court of Appeal decision in the past two years on the subject of parent company liability for the acts or omissions of its foreign subsidiary, along with Lungowe and Others v Vedanta Resources PLC ("Vedanta") and Okpabi and Others v Royal Dutch Shell Plc ("Okpabi").

Background

Proceedings were brought by 218 Kenyan citizens, who were employees, former employees or residents of the Kenyan tea plantation ("Plantation"), against Unilever Plc ("UPLC") (the UK based parent company) and Unilever Tea Kenya Limited ("UTKL") (the foreign subsidiary which owned and operated the Plantation in Kenya), for a failure to implement adequate safety measures to prevent the inter-tribal ethnic violence carried out by armed criminals on the Plantation, following the 2007 Kenyan presidential election. The claimants alleged that:

the risk of violence was foreseeable by UPLC and UTKL;
UPLC and UTKL owed a duty of care towards the claimants to protect them from the risks of violence; and
UPLC and UTKL breached that duty of care because of their failure to implement adequate safety measures to protect the claimants from violence.

First Instance

The applicable law

In determining whether UPLC owed a duty of care towards the claimants, Laing J. applied the three-stage test adopted in Caparo Industries Plc v Dickman and Others ("Caparo Test"), as follows:

the damage suffered by the claimant should be foreseeable by the defendant;
there should exist a relationship of proximity or neighbourhood between the defendant and claimant; and
it should be fair, just and reasonable to impose a duty of care.

Judgement

Applying the Caparo Test to the facts of the case and in particular considering the factors identified in Chandler v Cape Plc, Laing J. held that the claimants failed to meet the threshold of the Caparo Test and therefore did not have a good arguable claim against UPLC or UTKL.

Foreseeability

Laing J. determined that the damage suffered by the claimants was not foreseeable by UPLC or UTKL. It was not enough for the claimants to simply show that following the 2007 Kenyan presidential election, violence was generally foreseeable in Kenya - the key issue was whether the particular damage suffered by the claimants was foreseeable by UPLC or UTKL. It was not because:

UPLC was a UK based parent company and whilst some post-election violence was foreseeable in that area, UPLC had no means of foreseeing that such atrocities would have occurred on the Plantation itself; and
nothing remotely comparable had ever before occurred on the Plantation.

Fair, just and reasonable

Laing J. considered that it would not be fair, just and reasonable to impose a duty of care on UPLC because:

UPLC was not required to act as a "surrogate police force to maintain law and order" in Kenya and UPLC had rightly relied on the Kenyan authorities to maintain such law and order; and
UTKL was occupying the Plantation.

Proximity

Laing J. held, albeit obiter and with reluctance, that there was a sufficient degree of connection between the activities of and omissions to act by UPLC and the damage suffered by the claimants because of UPLC's involvement in UTKL's activities in Kenya.

The claimants appealed to the Court of Appeal in relation to the decision that UPLC and UTKL did not owe a duty of care. UPLC and UTKL appealed in relation to the decision that there was sufficient proximity.

Court of Appeal

Judgement

The Court of Appeal unanimously ruled that the judgement of Laing J. was correct and that UPLC did not owe a duty of care towards the claimants. However, the Court of Appeal formulated its decision on different grounds, particularly in relation to the second limb of the Caparo Test, holding that there was no relationship of proximity or neighbourhood between UPLC and the claimants. Accordingly, the Court of Appeal did not address the first and third limbs of the Caparo Test, as the Kenyan Courts would be better placed to determine these issues and the claims were dismissed without proceeding to trial. Permission to appeal to the Supreme Court has been permitted, as it has in Vedanta.

Proximity

The Court of Appeal reviewed in detail UPLC's corporate governance structure, crisis management policies, crisis escalation procedures, corporate risk management policies, financial accounts and knowledge of UPLC, that is, in relation to the prevention of crisis. The Court of Appeal held that UPLC did not possess the necessary degree of control over UTKL's operations in Kenya to substantiate the imposition of a duty of care, for the following reasons:

UPLC and UTKL were separate legal persons, each with their distinct business activities;
UTKL was not a direct subsidiary of UPLC;
there was no geographical proximity between UPLC and UTKL;
UTKL's management had never referred to UPLC for advice regarding the operation or management of the Plantation;
the day-to-day responsibility for the operation of the Plantation remained with UTKL;
UPLC did not have superior knowledge or expertise in relation to local political or ethnic matters, which was only within the knowledge of UTKL;
UPLC did not have knowledge or expertise of UTKL's systems of work;
whilst UPLC imposed various obligations on UKTL in relation to risk, these requirements were developed and implemented locally by UTKL;
UTKL had devised locally (without direction or advice from UPLC) the relevant policies for crisis and emergency management and training programmes; and
there was no evidence to suggest that UTKL was relying on UPLC to protect the claimants.

Group wide policies

The Court of Appeal, as in Okpabi, held that the presence of group-wide mandatory policies and standards issued by a UK parent company to be adopted by a foreign subsidiary was not in itself sufficient to establish a duty of care. It could be different where the parent company exerts direct control and influence over its foreign subsidiary, thus effectively retaining the day-to-day responsibility for the business operations overseas.

Parent company liability – two basic scenarios

The Court of Appeal echoed principles from recent cases regarding the two basic scenarios in which a UK parent company may owe a duty of care for the acts or omissions of its foreign subsidiary - where the UK parent has:

in substance taken over the management of the relevant activity of the subsidiary in place of or jointly with the subsidiary's own management; or
given relevant advice to the subsidiary about how it should manage a particular risk.

Having reviewed various UPLC and UTKL policies, financial accounts, reports and witness evidence given by the senior director of UTKL, the Court of Appeal decided that (i) UPLC did not take over the management of the relevant activity of UKTL, as this was managed locally by UTKL and (ii) UKTL did not receive relevant advice from UPLC in relation to the management of risks, which was in fact devised, implemented and overseen by UKTL in Kenya, by way of local risk management policies, assessments and operational plans.

The Court of Appeal cautioned that the circumstances identified above should only be treated as 'guidance' as to the relevant considerations and do not create a new separate test (distinct from the Caparo Test) for imposing a duty of care for parent company liability.

UK subsidiaries

Although Unilever, Vedanta and Okpabi deal with foreign subsidiaries of UK parent companies, the same principles will equally apply to a UK subsidiary of a UK parent company.

Lessons to be learned

The judgements in Vedanta, Okpabi and Unilever are an aide memoire of the dangers facing UK parent companies with operations overseas through a foreign subsidiary. In light of such risks, UK based multinational corporations should consider the issues listed below to counter the potential imposition of a duty of care:

carry out risk assessments;
consider the human rights risk within the relevant supply chains and operations overseas;
ensure that there is a distinction of business and operational activities and systems with the foreign subsidiary;
retain evidence to prove the independence of the foreign subsidiary by having separate boards, committees and processes;
avoid engaging in the day-to-day management and decision making of the operations in respect of the foreign subsidiary;
make sure that policies or procedures in relation to the operation of activities overseas are produced, developed and implemented by the foreign subsidiary locally, even if initiated by way of group-wide standards; and
ascertain a system for effective management of operational grievances locally.

Volkan Palanci (Co-Author) is a Trainee Solicitor from the Canary Wharf Group Plc and is currently on secondment in the Corporate Department at Fieldfisher and contributed to the article.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

UK: UK Parent Company Liability For The Acts Or Omissions Of Its Foreign Subsidiary