Editor's Note: Catherine Dunmore is an experienced international lawyer who practised international arbitration for multinational law firms in London and Paris. She recently received her LL.M. from the University of Toronto and her main fields of interest include international criminal law and human rights. Since October 2017, she is part of the team of the Doing Business Right project at the Asser Institute.

Introduction

The Court of Appeal in London recently handed down its judgment in Dominic Liswaniso Lungowe and Ors. v Vedanta Resources Plc and Konkola Copper Mines Plc [2017] EWCA Civ 1528 (Lungowe v Vedanta) addressing issues of jurisdiction and parent company liability. The judgment runs contrary to the historical legal doctrine that English domiciled parent companies are protected from liability for their foreign subsidiaries’ actions. This decision clarifies the duty of care standard a parent company owes when operating via a subsidiary and opens the gates to other English domiciled companies and their subsidiaries being held accountable for any human rights abuses.

Facts

In 2015, a claim was brought by 1,826 villagers from the Chingola region of Zambia against the London Stock Exchange listed metals and mining company Vedanta Resources Plc (Vedanta), which has a global asset base of almost US$40 billion. Vedanta’s subsidiary Konkola Copper Mines Plc (KCM), a Zambian public limited company which is the largest integrated copper producer in the country, was licenced to extract from the Nchanga copper mine near Chingola. The villagers claimed personal injury, damage to property and loss of income, amenity and enjoyment of land, due to alleged pollution and environmental damage caused by discharges from the Nchanga mine for over a decade. The claimants used Vedanta to anchor their claims in the English courts and received permission to serve KCM out of the jurisdiction. Both Vedanta and KCM applied for declarations that the Court had no jurisdiction to try the claims, or alternatively, that it should not exercise such jurisdiction. These challenges were dismissed at first instance by Mr Justice Coulson, and Vedanta and KCM appealed against his order.

Judgment

The Court of Appeal unanimously dismissed the appeals and confirmed jurisdiction against Vedanta and KCM. Led by Lord Justice Simon, the Court concluded that “there are no proper grounds for re-opening the Judge's decision. The appellants have not persuaded me that the Judge misdirected himself on the law, nor that he failed to take into account what mattered or that he took into account what did not matter. How the various matters weighed with him, either individually or together, was for him to decide, provided that he did not arrive at a conclusion that was plainly wrong. In my view, he did not reach a view that was wrong; he reached a conclusion that was in accordance with the law”.

In its determination of jurisdiction, the Court notably considered the following issues:

1. Whether the claimants' claim against KCM has a real prospect of success;

2. If so, whether there is a real issue between the claimants and Vedanta;

3. Whether it is reasonable for the court to try that issue;

4. Whether KCM is a necessary and proper party to the claim against Vedanta; and

5. Whether England is the proper place in which to bring that claim.

Of particular jurisprudential significance for future cases involving companies’ alleged human rights violations were the Court’s deliberations on issue two relating to parent companies and the duty of care.

Parent company liability and the duty of care

The Court of Appeal’s judgment sought to clarify the duty of care owed by a parent company through its subsidiary’s operations. The judges reviewed the benchmark cases for the imposition of such a duty of care and affirmed the following propositions:

1. “The starting point is the three-part test of foreseeability, proximity and reasonableness”, as enounced in Caparo Industries Plc v Dickman. The fact alone that Vedanta is KCM’s holding company would not make it arguable that Vedanta owed a duty of care, and additional circumstances were required to ground a properly arguable claim.

2. “A duty may be owed by a parent company to the employee of a subsidiary, or a party directly affected by the operations of that subsidiary, in certain circumstances”.

3. “Those circumstances may arise where the parent company (a) has taken direct responsibility for devising a material health and safety policy the adequacy of which is the subject of the claim, or (b) controls the operations which give rise to the claim”.

4. “Chandler v Cape Plc and Thompson v The Renwick Group Plc describe some of the circumstances in which the three-part test may, or may not, be satisfied so as to impose on a parent company responsibility for the health and safety of a subsidiary's employee”. If both parent company and subsidiary have similar knowledge and expertise and they jointly take decisions about mine safety, which the subsidiary implements, both companies may owe a duty of care to those affected by those decisions.

5. “The evidence sufficient to establish the duty may not be available at the early stages of the case”, and may be better judged after the pleadings in the case.

In its deliberations, the Court of Appeal considered certain factors as relevant to the existence of a duty of care between Vedanta and the villagers, namely:

• A Vedanta report which stressed that oversight of all its subsidiaries rests with the Board of Vedanta itself and expressly refers to problems with discharges into water at the mine in Zambia.

• A Management and Shareholders Agreement which contractually obliged Vedanta to provide KCM with, among others, geographical and mining services and employee training as well as to procure feasibility studies in accordance with “acceptable mining, metal treatment and environmental practices conducted in Southern Africa”.

• Vedanta's provision of environmental and technical information and Health Safety and Environmental training, as well as its public statements on its commitment to addressing environmental risks and technical shortcomings in KCM's mining infrastructure.

• Evidence from a former KCM employee about the extent of Vedanta's control of KCM’s operational affairs.

Following the above principles relating to the duty of care and in light of the evidence displayed by the claimants, it was concluded that Mr Justice Coulson was entitled to reach his conclusions. Whilst the claim against Vedanta may or may not succeed at trial, it could not be dismissed as not properly arguable. In other words, the Court accepted “that there is a serious question to be tried which should not be disposed of summarily, notwithstanding the question goes to the court's jurisdiction”.

The Court affirmed the long-established principle that a parent company does not automatically owe a duty of care to someone affected by its subsidiary’s actions. Yet, as Lord Justice Simon observed, the defendant's assertion that “there had been no reported case in which a parent company had been held to owe a duty of care to a person affected by the operation of a subsidiary” does not at all “render such a claim unarguable”.

Rather, the claimant must prove that such a duty of care arises; more particularly that the parent company has taken direct responsibility for material health and safety policies or controls its subsidiary’s operations. It follows that the more integration and supervision that can be demonstrated between a parent company and subsidiary, the greater the chance of a duty of care being found, and accordingly the parent company being accountable for any human rights abuses. Moreover, the Court’s hesitancy to conclude at an early stage in proceedings that no duty of care exists, and consequently that there is no real issue to be tried, will likely allow more cases to be determined during the hearing rather than at an interlocutory stage.

Lungowe v Vedanta’s duty of care in light of France’s new duty of vigilance law

Earlier in 2017, the French National Assembly adopted the loi relative au devoir de vigilance des sociétés mères et des entreprises donneuses d'ordre which established a new duty of care for large multinational companies operating in France. The law imposes an obligation of vigilance on companies incorporated or registered in France during two consecutive fiscal years that have either at least 5,000 employees themselves and through French subsidiaries, or have at least 10,000 employees themselves and through subsidiaries located in France or abroad.

The law requires such a parent company to establish and implement a publically available vigilance plan relating to its activities and those of its subsidiaries. The plan includes due diligence measures to identify risks and to prevent serious violations of human rights and fundamental freedoms, health and safety and the environment, resulting from the activities of the company and its subsidiaries, as well as the relevant activities of its subcontractors and suppliers under their commercial relationship. The law lists five such due diligence measures:

1. A risk mapping that identifies, analyses and ranks risks

2. Procedures for regular evaluation of subsidiaries, subcontractors or suppliers with whom an established commercial relationship is maintained

3. Adapted actions to mitigate risks or prevent serious harm

4. An alert mechanism and the collection of reports relating to the existence or realisation of risks, drawn up in consultation with the representative trade union organisations

5. A monitoring mechanism to follow-up on the plan’s implementation and evaluating its effectiveness.

Any company put on formal notice to comply with these vigilance obligations can face penalties if they fail to do so within three months.

    The French law is widely viewed as a major step forward, although by no means a panacea, to improving corporate respect for human rights and the environment. Although only applicable to an estimated 100-150 large companies, in passing the law the French National Assembly acknowledged the need for corporations to be held accountable for their worldwide activities, rather than hiding behind the corporate veil. The new French law requirements are markedly different from those found in the Modern Slavery Act 2015 of the United Kingdom and the California Transparency in Supply Chains Act of 2010, which only require companies to report on any efforts to identify certain forms of human rights related risk. In comparison, companies caught by the French law are actually required to implement a vigilance plan.

However, under the French law the legal emphasis is on a company evidencing it has done everything in its power to establish and implement this vigilance plan, rather than focusing on guaranteeing results in terms of human rights compliance. French corporations can therefore effectively reduce their duty of care liability by creating and executing a plan with accompanying due diligence measures. In contrast, following the jurisprudence of Lungowe v Vedanta, a parent company’s liability may actually increase if it takes responsibility for such material health and safety policies. Accordingly, in order to reduce its liability and the imposition of a duty of care, a parent company might seek to demonstrate a very low level of integration and supervision between itself and its subsidiaries.

This leads to the unsatisfactory position that parent companies in both nations might be able to avoid liability for the actual damage arising from their subsidiaries’ human rights violations. A parent company in France might avoid accountability for its subsidiary’s actions through demonstrating vigilant control and surveillance, whilst a parent company in England might similarly benefit from demonstrating distance and separation. In either case, there remains a legal lacuna whereby parent companies may evade responsibility for grave rights breaches.

Conclusions

Whilst the English courts retain a significant discretion when exercising their judgement in jurisdictional challenges, the judgment in Lungowe v Vedanta may lead to an increase in claims before the courts for alleged human rights abuses by foreign subsidiaries of English domiciled parent companies. The decision might prompt vulnerable English corporations to reassess their compliance with the United Nation’s Guiding Principles on Business and Human Rights, and to demonstrate both their own and their subsidiaries’ respect for and adherence to human rights standards throughout their training, policies and operations. Yet, the significant converse risk is run that parent companies will distance themselves from their subsidiaries’ actions. Ensuring that the responsibility for compliance with human rights obligations remains with a subsidiary may reduce the likelihood of a duty of care being found at a parent company level for any extraterritorial human rights abuses. Ultimately, only time will tell whether Lungowe v Vedanta prompts English domiciled companies to account for, or instead avoid, their subsidiaries’ human rights abuses.

Editor's note: Mercedes is a recent graduate of the LL.B. dual-degree programme English and German Law, which is taught jointly by University College London (UCL) and the University of Cologne. She will sit the German state exam in early 2022. Alongside her studies, she is working as student research assistant at the Institute for International and Foreign Private Law in Cologne. Since September 2020, she joined the Asser Institute as a research intern for the Doing Business Right project.

In Part II of this blog series, I intend to outline the different proposals for a Lieferkettengesetz. First, the Initiative Lieferkettengesetz’s model law, secondly the proposal submitted by the Ministry for Labour and Social Affairs and the Ministry for Economic Cooperation and Development, and lastly, I will present the amendments pushed by the business sector and the Ministry for Economic Affairs and Energy.

Initiative Lieferkettengesetz model law

The Initiative Lieferkettengesetz, a consortium of over 110 NGOs, presented their model law in early 2020. It draws inspiration from the ECCJ’s position paper “Key Features of Mandatory Human Rights Due Diligence.”

The scope of application of the model law covers companies with over 250 employees. However, if a business operates in a high-risk sector, it would have to implement human rights due diligence into its global supply chain even if it employs fewer than 250 people. Examples of high-risk sectors include the manufacturing of arms, the chemical and automotive industry, financial services and many others. Initiative Lieferkettengesetz also advocates for certification and auditing services to be included in the list of sectors that pose great risk for human rights and the environment; this is because this sector lacks adequate regulation, is prone to corruption and errors – with often devastating consequences.

The Initiative Lieferkettengesetz demands that not only companies that have their seat in Germany be covered by Supply Chain Regulation. Instead, all companies that show a ‘genuine link’ to Germany should be included in the scope of application. They argue for the clause to be drafted similarly to sec 54(12) Modern Slavery Act 2015, adding the following clarification: The company must either have an administrative seat, permanent establishments (i.e. branches, factories, storage facilities etc.), permanent representatives on German territory or provide German companies with some form of service at least twice a year. Foreign companies, the shares of which are sold on the German stock market, should also be covered by the model law. Initiative Lieferkettengesetz explicitly excludes mere investments in Germany.

In outlining the due diligence requirement, Initiative Lieferkettengesetz builds on the individual aspects set out in the UNGPs: (1) policy statement; (2) risk analysis; (3) countermeasures; (4) reporting; (5) grievance mechanism.

The risk analysis should be carried out once a year at the minimum. Ideally, it ought to be carried out before every strategic decision. It encompasses factual and potential risks to human rights and the environment. Risks need to be assessed according to how likely they are to occur, the extent of potential damage caused, the importance of the legal interest that needs to be protected, and the scope for restitution. On the basis of this risk analysis, businesses should implement countermeasures to prevent or mitigate any harm to human rights and the environment caused by their business activity.

The scope of the duty covers human and labor rights as well as environmental standards. The model law explicitly refers to the Universal Declaration of Human Rights, the International Covenant on Civil and Political Rights, nine ILO Conventions, and four UN Conventions. Where company’s business activity is linked to production of arms or surveillance technologies, the scope of duty should also cover the Geneva Conventions with their additional protocols. The necessary standard of care to be adopted in the due diligence analysis hinges upon the term ‘appropriateness’. The ‘appropriateness’ of a measure depends on size, business activity, nexus between business activity and risk, and the severity of the threat to human rights and the environment. There is not one ready-made solution for every risk occurring in supply chains; that is why the model law provides some flexibility to companies in order to determine the most efficient measure that needs to be implemented. Initiative Lieferkettengesetz emphasizes that it is not enough to take part in multi-stakeholder sectorial initiatives or outsource their obligation to auditing or certification services in order to discharge the duty to implement countermeasures. Moreover, companies should internally document their risk analysis and countermeasures and should also regularly submit reports to the Government.

Initiative Lieferkettengesetz proposes an array of sanctions in case of breach of duty: fines, exclusion from public procurement and foreign trade promotion, and crucially, civil liability.

Civil liability in German law is based on § 823(1) of the Civil Code (BGB), which protects narrowly interpreted legal interests –bodily integrity, health, liberty, property and ‘others’, i.e. privacy.  The Initiative Lieferkettengesetz proposes to add a clause in the model law which states that human and labor rights, found in the treaties ratified by Germany, ought to be integrated to the legal interests protected by § 823(1) BGB. Where necessary, they should fall under ‘other’.

German scholars often criticize that human rights do not have any legal ‘contours’; that they are too vague to justify civil liability. The Initiative Lieferkettengesetz counterargues by comparing them to other ‘vague’ legal interests such as privacy. In order to determine if someone’s right to privacy was breached, courts engage in an analysis of proportionality: the finding that a breach of privacy occurred depends on how likely, severe, foreseeable and avoidable any harm caused was.

Considering how difficult it is for the claimant to gather evidence in the case of human rights atrocities occurring in global supply chains, Initiative Lieferkettengesetz suggests that the claimant should benefit from a reversed burden of proof: It ought to be upon the company to prove that the harm to human rights or the environment was neither foreseeable nor avoidable by implementing appropriate measures.

Crucially, the supply chain law should be characterized as overriding mandatory provision in line with Article 16 Rome II. As a result, even if rules of private international led to the application of foreign tort law, the provisions of the Lieferkettengesetz would still be given effect to.

Government’s position paper (Eckpunkte)

During their party conferences in November and December 2019, both the CDU (Christian Democratic Union) and the SPD (Social Democratic Party) came out in support for the Lieferkettengesetz. Ministers Hubertus Heil (Minister of Labour and Social Affairs, SPD) and Gerd Müller (Minister for Economic Cooperation and Development, CSU [Christian Social Union, the CDU’s Bavarian affiliate]) took it upon them to draft the government’s position paper (Eckpunkteplan) which would eventually serve as basis for any further draft.

They intended to present their paper to the public on 10 March 2020 and had already scheduled a press conference. After pressure from the Chancellery (Ministry that supports Chancellor Merkel in the execution of her duties), which in turn appeared to have been pressured by the business sector, they cancelled the press conference.

Their internal position paper, however, leaked in February 2019, causing outrage among German business representatives. It was portrayed as ‘harmful’ and based on ‘arbitrary monitoring’. The president of the Federal Employers’ Association (Bundesvereinigung der Deutschen Arbeitgeber) even exclaimed that with such a law, he would already have ‘one foot in prison’.

In June 2020, the two Ministries published a new version of the position paper. If one compares the position paper to the model law presented by Initiative Lieferkettengesetz, it becomes clear that Heil and Müller opted for a watered-down version of the law. The scope of application is limited to companies with over 500 employees. It does not account for smaller businesses, which operate in particularly high-risk industries. The Lieferkettengesetz will only be applicable to companies that either have their seat in Germany or which can show a ‘strong link’ to Germany. The position paper further clarifies that the requirement of a ‘strong link’ is fulfilled if businesses make strategic decisions in Germany; mere business activity does not suffice.

Due diligence comprises four aspects: (1) risk analysis; (2) effective countermeasures; (3) grievance mechanism; (4) reporting. Just like with the model law, companies will have to analyze how their business activity affects human rights internationally. However, the Eckpunkteplan does not refer to human rights treaties. Instead, it points to human rights risks: forced labor, child labor, discrimination, freedom of association, workers’ rights, violation of property rights. Protection is limited to the particular legal interests enshrined in § 823(1) BGB (bodily integrity, health, liberty, property and privacy). Crucially, environmental damage and corruption are in themselves not part of the risk analysis; they merely constitute factors to consider. Furthermore, the companies’ human rights due diligence does not include any obligation to engage with relevant stakeholders. 

Claimants do not benefit of a reversed burden of proof. Commentators further criticize that the position paper includes a possibility for companies to limit their liability to cases of gross negligence or intent by participating in state-accredited sectoral initiatives. This is considered regrettable because sectoral initiatives such as the ‘Green Button’ have proven to be of limited impact. Such a provision opens a way for businesses to relatively easily escape liability altogether. Lastly, the position paper provides for the law to come into force three years after it had been passed. 

The position paper should have been presented to the Cabinet in March 2020, but the Cabinet’s meeting was postponed due to Covid. Peter Altmaier, Minister of Economic Affairs and Energy (CDU), does not seem to be in a rush to discuss the Eckpunkteplan. He blocked another meeting in August. This is particularly problematic because proper procedure demands that the position paper is discussed before drafting begins. If Cabinet does not discuss the position paper this autumn, there will be no possibility to adopt the Lieferkettengesetz before the general election in autumn of 2021.

Even if Altmaier cannot postpone its passing, he at least tries to ensure the law is further watered down beyond recognition. Altmaier forcefully demands that the scope of application is limited to companies with over 5,000 employees – of which only 250 exist in Germany. While one can argue that the number of employees is open to compromise, there are aspect of the law that are non-negotiable. Altmaier strongly opposes any imposition of civil liability and exclusion from public procurement. NGOs fear that by giving in to these demands, the Lieferkettengesetz will become toothless.

The current political situation shows how much power the Ministry of Economic Affairs and Energy holds. Altmaier comes close to having a veto right – even though officially, all ministries carry equal weight in the negotiations. This is particularly dangerous because, as official documents show, the Ministry of Economic Affairs and Energy has close personal ties to industry representatives and business lobby groups.

Nevertheless, there are reasons to remain hopeful. Looking at the political and societal context prevailing in France before the loi de vigilance was passed, one can draw many parallels to the situation in Germany: Even though Altmaier seems to believe that global markets can self-regulate and that voluntary commitments are enough, many other Ministries and, crucially, Chancellor Merkel, do not. Furthermore, there is a strong NGO alliance mobilizing the German public in favor of binding legislation – and it is currently supported by 76% of the public. Public campaigns, protests and conferences put pressure on politicians. Thanks to the French campaigners in the early 2010s, it is now clear that binding legislation is achievable. Despite the lack of cooperation from the Ministry of Economic Affairs and Energy, a Lieferkettengesetz is as close as it has ever been.

Conclusion

There are reasons to believe that the Lieferkettengesetz is not only feasible, but also in sight. While NGOs provided a very ambitious and thorough model law, the government’s position paper would also constitute a step into the right direction – at least if Altmaier and the Ministry of Economic Affairs and Energy fail in bending the text further towards businesses’ needs.

In order for the Lieferkettengesetz to be passed this term, Cabinet will need to discuss the position paper this autumn. Timing is of particular importance: While Chancellor Merkel has come out in support of binding legislation, it is unclear whether her successor will do so, too.

The German debate has also important repercussions at the European level, as Germany is currently occupying the Presidency of the Council of the EU. In this context, the German government has publicly committed to pushing for substantive, cross-sectoral and mandatory human rights due diligence regulation. If the German public keeps the pressure on and the political stars align, 2020 could even be remembered as the birth year of a new brand of corporate responsibility made in Germany.