Can a Parent Company be liable for a Subsidiary’s operations?
The recent Supreme Court decision in Okpabi v Royal Dutch Shell Plc  UKSC3, completed a triumvirate of cases in which the Court has been asked to rule on whether a parent company can be liable for a subsidiary’s operations.
In 2018, the Court of Appeal held in the case of AAA v Unilever PLC  EWCA Civ1532 that Unilever were not liable where one of its subsidiaries did not, allegedly, take appropriate measures to protect its workers and local residents from violence in the lead up to the Kenyan Presidential Election. It ruled that Unilever had not intervened enough to establish any direct duty of care to the workers and residents and that the subsidiary had conducted its own affairs independently. However, the Court of Appeal did state that a parent company can assume a direct duty where it has taken over the management of its subsidiary’s activities, or given advice on how the subsidiary should manage a particular risk.
In 2019, the Supreme Court ruled in Vedanta Resources PLC v Lungowe  UKSC20, that a parent company could assume liability for a subsidiary’s activities, provided it assumed a duty of care to third parties in relation to those activities.
Interestingly though, the Supreme Court did not approve specific circumstances cited in the Unilever case regarding the parent company taking over management of the subsidiary’s activities or offering advice in relation to the management of a particular risk. Instead it found that a parent company is at risk of assuming a duty of care where it administers and implements group-wide policies for its subsidiaries. The Supreme Court therefore arguably widened the scope whereby a parent company could be liable and potentially made it easier for such liability to occur.
In the Okpabi case, the Supreme Court made the following further comments on how parent companies could assume liability for their subsidiaries:-
- Whether a parent company assumes a duty of care regarding its subsidiary’s operations depends on the extent of its participation in the management of that subsidiary’s operations.
- The parent company does not need to “control” a subsidiary to participate in its management. A subsidiary can have legal control of itself, but delegate its management functions to a parent company.
- A parent company may incur liability if it holds itself out as exercising supervision and control of its subsidiaries, even if in reality, it did not do so.
- Group policies and standards set by parent companies to their subsidiaries can never create a duty of care, in circumstances where the parent did not enforce them.
- The mere fact that a parent company has a network of subsidiaries or is in an international group, was not relevant to whether it assumed a duty of care.
- Where reporting and business lines were established that operated across subsidiaries and were distinct from the corporate status of the different group companies, then this could be seen as an indication of the parent company’s control or participation in the management of its subsidiaries.
- A parent company is more likely to be exerting operational control where internal corporate policies and procedures are imposed by it on its subsidiaries. Here, it will be necessary for the procedures to be examined. In this case, health and safety audits and remediation plans were produced to the parent company so that it could police how its policies were implemented.
- The Supreme Court in the Okpabi case, allowed the appeal and therefore effectively allowed the trial against the parent company to proceed.
So what can be learnt from these three cases?
It is important that a parent company properly considers its involvement with its subsidiaries.
A parent company can impose policies on its subsidiaries, but should be careful not to be seen to be running them or administering them on behalf of the subsidiary.
A parent company should ensure that all of the policies that it imposes on its subsidiaries are correct. Where such policies are not, the blame may fall on the parent company.
It is always safer to allow the subsidiary’s Board to deal with the implementation of group-wide policies.
Where possible, when the parent is not responsible, it should be expressly stated in any group-wide documents or communications that this is the case. Similarly, it should also be made clear that it is for the subsidiary to implement and administer such policies.
Where the parent is advising a subsidiary on risk, it should be particularly careful to consider its own liability and the implications which may flow from this.
If you would like to learn more about this particular topic or have any questions, please do not hesitate to contact Graham Mead, a partner in the firm’s Commercial Litigation Team on 01473 298234 or by email at firstname.lastname@example.org.