Strong environmental, social and corporate governance (ESG) strategy management can continue to create long-term value for stakeholders and enable companies to manage risk. ESG considerations are increasingly important, not only from an investment, customer, community and regulatory perspective, but also in terms of managing reputational and litigation risk. ESG litigation is on the rise, as demonstrated by another recent case which evidences a further potential widening of ESG-related international tort claims.
In this article, we discuss how tort claims are evolving in an ESG context and the impact of recent cases on the widening of parent company liability. What are the key points to note and in what areas should parent companies look to be more ESG conscious to take account of these broadening responsibilities?
The growth of transnational tort claims in an ESG context
In recent years, we have seen several parent company liability cases where claimants have pursued claims against a UK domiciled parent company in the English courts, for claimed ESG failings by an overseas subsidiary. These cases appear to have collectively widened a corporate's duty of care in certain circumstances, which are particularly relevant in the ESG sphere.
It is a well-established principle that each company in a corporate group has its own legal personality. It is also well-established in tort law that a company will not be liable for the acts of a subsidiary simply because of its shareholding. However, a parent company may assume a duty of care to third parties at risk of harm from the acts and/or omissions of its subsidiaries.
This type of tort claim has recently been tested in several cases where the parent company is located in what could be perceived from the claimant's perspective to be a "more favourable" jurisdiction to that where the ESG failings are alleged to have taken place. For various reasons, the English courts are becoming an increasingly popular battleground for ESG-related claims (see, for example, the cases referred to in our earlier articles on 'ESG - Court refuses permission (again) for derivative claim', 'Climate litigation in the UK' and our Top 10 pointers on 'Managing litigation risks').
Widening of ESG parent company liability in recent cases
Recent cases where this type of tort has been tested include Vedanta Resources Plc v Lungowe, Okpabi v Shell and Begum v Maran (UK) Ltd, among others, all of which have seen claimants litigate against a UK-based corporate for the acts of its overseas subsidiary. These cases have not only succeeded in widening a parent company's potential duty of care to third parties, but also succeeded in bringing these matters before the English courts.
However, a recent attempt to extend the application of these principles to the actions of third party suppliers within an international supply chain was judged to be a step too far (at least for now), with the High Court concluding that a foreign court was the appropriate forum to hear any such claim.
That application shows (perhaps unsurprisingly) that the English courts may be less willing to find that they have jurisdiction to hear these cases in situations whereby the claims are based on alleged breaches by an unrelated third party, in this case a supplier, rather than the parent's subsidiary or group company.
Although the merits of the case were not addressed in detail (as this was only a jurisdictional hearing) and are now to be determined by the foreign court, attempts to expand the liability of a UK corporate in this area are likely to continue. This therefore remains an area of risk exposure that corporates need to continue to carefully monitor, particularly as supply chains become more integrated.
Key takeaways
- Liability can flow through the supply chain. Whilst that was not the outcome in this case, it does demonstrate a continued trend towards parties not only trying to push to bring ESG-related claims within the ambit of the English courts, but also in parallel, trying to push to attribute liability for the actions of overseas third parties on to UK corporations. The extent to which a company could be held liable in situations where services have been 'outsourced' remains to be seen, but given the high profile decision in Vedanta (and other claims), claimants are unlikely to be deterred and so we can expect to see this tested further in coming years. The litigation risk attributable to dealing with third party suppliers who have poor ESG compliance rates is a risk that should be factored in to supply chain decision-making (particularly given the potential impact, cost and damage that would flow from such a claim).
- Post Brexit effects. Although the English courts remain willing to consider jurisdiction arguments in claims brought against English domiciled companies, they will also decline to exercise jurisdiction where appropriate. Given the increasing number of group claims against English domiciled companies for events occurring abroad, this is important and will no doubt be welcomed by corporate defendants. Claimants will therefore need to give detailed consideration to the application of the post-Brexit tests on whether the English court has jurisdiction to hear a claim before pursing the same.
- Human rights. Looking particularly at Article 6 of the European Convention of Human Rights, which covers the right to a fair trial, this may have an impact on the outcome of cases in this area. In previous cases, such as Vedanta, the absence of a means of funding or experienced lawyers in a host state was a significant factor in the court's decision-making in determining that the case should be heard in England. In this recent case, however, the Court took comfort from a number of undertakings to that effect, which were given by the defendant. An undertakings-based approach could therefore act as something of a guide to other defendants facing similar claims in the future who are looking to prevent the claim being pursued against them in England.
- The rise of ESG-related claims continues. As businesses and individuals continue to become more ESG conscious, there are many related factors that companies should take into consideration while carrying out their day-to-day activities. In addition to any direct liability in respect of ESG claims (which clearly have the potential to be costly), the other costs in terms of management time, loss of employee pride and engagement, and the ongoing reputational damage in being associated with such actions, can be significant and long lasting. Companies failing to act on ESG issues risk losing investors and customers. Therefore, companies should be conscious of how activity (including that of unrelated third party suppliers) that goes against their ESG policies (or wider perceptions of what they "should" be doing in that arena) can affect their investor base, share prices and customer relations. They should also be particularly mindful of investors who rely on ESG disclosures when investing, as they may seek to hold companies to account for the actions of unrelated third party suppliers if they suffer losses on their investments as a result.
Conclusion
Although this recent case did not proceed to a full trial in the UK, the case does highlight the need for companies who are multi-national, with complex supply chains that extend outside of the UK, to be wary of potential allegations of impropriety and misconduct in their value chains (both in terms of legal and reputational repercussions). We predict that this is not going to be the end of these sorts of cases - someone will no doubt try again, hence the need for caution.
Until then, the extent to which a company could be held liable in situations where services have been 'outsourced' to third parties, remains to be seen. Companies should therefore be mindful of the litigation risk and potential liability associated with the provision of services and functions in relation to third parties in their supply chain.
For more information or to discuss any of the key takeaways here further, please contact Sean Adams or Emma Carr.
Footnotes
[] Vedanta Resources Plc v. Lungowe [2019] UKSC 20
[] Gowling WLG article on the Vedanta Resources Plc & Another v. Lungowe & others case, April 2019
[] HRH Okpabi v Royal Dutch Shell Plc [2021] UKSC 3
[] Begum v Maran (UK) Ltd [2021] EWCA Civ 326