Editor’s note: Maisie Biggs recently graduated with a MSc in Global Crime, Justice and Security from the University of Edinburgh and holds a LLB from University College London. She is currently an intern with the Doing Business Right project at the Asser Institute in The Hague. She previously worked for International Justice Mission in South Asia and the Centre for Research on Multinational Corporations (SOMO) in Amsterdam.

“No one who comes to these courts asking for justice should come in vain. The right to come here is not confined to Englishmen. It extends to any friendly foreigner. He can seek the aid of our courts if he desires to do so. You may call this ‘forum shopping’ if you please, but if the forum is England, it is a good place to shop in both for the quality of the goods and the speed of service.”

Lord Denning in The Atlantic Star [1973] 1 QB 364 (CA) 381–2

The United Kingdom Supreme Court today has handed down Vedanta Resources PLC and another (Appellants) v Lungowe and others (Respondents) [2019] UKSC 20, a significant judgement concerning parent company liability and the determination of jurisdiction for these claims. Practically, it now means for the first time a UK company will face trial and potentially accountability in their home jurisdiction for environmental harms associated with operations of foreign subsidiaries. 

This is a closely-watched jurisdiction case concerning a UK parent company’s liability arising out of the actions of its foreign subsidiary. The claimants are 1826 Zambian citizens from the Chingola region of the Copperbelt Province. This group action is against UK-domiciled Vedanta Resources PLC and its subsidiary KCM, a second defendant which is incorporated in Zambia. The original claims concern discharges from the KCM-owned Nchanga mine since 2005 which have allegedly caused pollution and environmental damage leading to personal injury, damage to property and loss of income, amenity and enjoyment of land. 

Following the initiation of this claim, in 2015 Vedanta and KCM challenged the jurisdiction of the English courts, however Coulson J dismissed their applications. The Court of Appeal then upheld the dismissal of those applications, so the defendants appealed to the Supreme Court. (See our previous blog on the case here).

The Supreme Court today denied the appeal by Vedanta Resources and KCM, and allowed the claim to proceed to merits in England. The Court made it clear the real risk that the claimants would not obtain access to substantial justice in Zambia was the deciding factor in the case. The Court denied there was an abuse of EU law by the claimants using Vedanta as a jurisdictional hook to sue both the parent company and subsidiary in England, and the claimants succeeded in demonstrating there was a “real triable issue”, nonetheless Zambia was held to be the “proper place” for the case. However, because the Court supported the finding of the first instance judge regarding the risks faced by claimants in accessing substantial justice in Zambia, the appeal was denied, and the case can proceed in England. 

This is a significant judgement, as it now means for the first time a UK company will face trial and potentially accountability in their home jurisdiction for environmental harms associated with operations of foreign subsidiaries. Lord Briggs delivered the judgement on four major issues: the potential for abuse of EU law; whether there was a real triable issue against Vedanta; whether England is the proper place for these proceedings; and whether there was a real risk that substantial justice would not be obtainable in that foreign jurisdiction. 

Why is this significant? For those following this case, and the appeals of Okpabi & Ors v Royal Dutch Shell Plc & Anor (Rev 1) [2018] EWCA Civ 191 and AAA & Ors v Unilever Plc & Anor [2018] EWCA Civ 1532 in the English courts, there are two major findings in this judgement that will likely impact future cases concerning parent company liability. Firstly, the reasoning behind the finding of a “real triable issue” between a foreign claimant and UK parent company, and secondly the primacy the Supreme Court placed on the significance of access to justice as a jurisdictional hook for claims in England.

A. Finding of a “real triable issue” between a foreign claimant and UK parent company

Previous major cases decided in lower courts have fallen at this hurdle. The courts in Okpabi and AAA v Unilever both allowed jurisdictional appeals because they determined there was no real triable issue between the claimants and the UK parent company. In this case, Lord Briggs characterised the test as simply “whether Vedanta sufficiently intervened in the management of the Mine owned by its subsidiary KCM to have incurred, itself (rather than by vicarious liability), a common law duty of care to the claimants [44].”

Four major developments allowed this to happen; firstly, claimants can more heavily rely on the potential of future disclosure of internal defendant documents; secondly, the Chandler criteria ought not to be a ‘straitjacket’ for finding a parent company exercised control; thirdly, that the size of a company’s operation does not dilute a duty of care, and finally that group-wide policies and guidelines alleging group control are potentially sufficient as a basis to argue a triable case of parent company control. Interestingly, all of these points (without explicitly saying so) went against the Court of Appeal’s judgement in Okpabi. 

1. The potential for evidence to emerge upon disclosure

The finding of a “real triable issue” has been a challenge in past cases because particular facts must be determined before the disclosure of the defence’s documents, and there runs a risk of a ‘mini-trial’ ensuing based on limited evidence. This may be of interest to lawyers and courts in other jurisdictions which do not have the same disclosure requirements: the English courts have had to establish how to best ascertain the likelihood of a duty of care based on only publicly-available documents. 

In past, claimants were told they could not base their claim on merely the potential for more evidence to emerge upon disclosure. Lord Justice Simon previously found in Okpabi in the Court of Appeal that “[a]lthough, the claimants make a further point that [the presented evidence] is illustrative of what may emerge on disclosure, the difficulty is that jurisdiction is founded on a properly arguable cause of action and not on what may (or may not) become a properly arguable cause of action [122].” Sir Geoffrey Vos agreed, saying “I might mention in closing that I thought throughout the hearing of the appeal that the court had a responsibility in a case of this kind not to strive to find a reason to allow jurisdiction [208].”

Lord Briggs was very clear on this point: 

“[The question whether the] level of intervention in the management of the Mine [was] requisite to give rise to a duty of care upon Vedanta to persons living, farming and working in the vicinity… is a pure question of fact. I make no apology for having suggested during argument that it is blindingly obvious that the proof of that particular pudding would depend heavily upon the contents of documents internal to each of the defendant companies, and upon correspondence and other documents passing between them, currently unavailable to the claimants, but in due course disclosable [44].”

This confirms Lord Justice Simon’s (interestingly different from his stance in Okpabi) finding when considering this case in the Court of Appeal. He held that at the early stage of a case the unavailability of sufficient evidence ought not be a barrier, rather “much will depend on whether (…) the pleading represents the actuality [83].”

Defendants in these cases have been pushing for the evidentiary bar to be raised, while judges have bemoaned the rising piles of evidence for only preliminary hearings. This decision should lower both the bar and the piles. Section 3 (below) will address the alternative publicly available evidence the courts may now look to.

2. Rejection of a Chandler ‘straitjacket’

Lord Briggs did not take the view that this parent company liability is a novel category of common law negligence liability requiring specific criteria, rather “there is nothing special or conclusive about the bare parent/subsidiary relationship, it is apparent that the general principles which determine whether A owes a duty of care to C in respect of the harmful activities of B are not novel at all [54].” He positively cited Home Office v Dorset Yacht Co Ltd [1970] UKHL 2 as a circumstance in which it had previously been appropriate to find this duty of care. This is a reversal of previous English judgements that have pushed toward more stringent (and difficult to prove without private documentation) criteria for determining a duty of care in these types of cases. 

This case, and Okpabi, AAA v Unilever, and Thompson v The Renwick Group Plc [2014] EWCA Civ 635, all draw from the judgement of Lady Justice Arden in Chandler v Cape Plc [2012] EWCA Civ 525. In this case Arden concluded that there were “appropriate circumstances [80]” in which liability may be imposed on a parent company for a subsidiary's employees’ health and safety. Four of these that were relevant for this case included:

“(1) the businesses of the parent and subsidiary are in a relevant respect the same; (2) the parent has, or ought to have, superior knowledge on some relevant aspect of health and safety in the particular industry; (3) the subsidiary's system of work is unsafe as the parent company knew, or ought to have known; and (4) the parent knew or ought to have foreseen that the subsidiary or its employees would rely on its using that superior knowledge for the employees’ protection. For the purposes of (4) it is not necessary to show that the parent is in the practice of intervening in the health and safety policies of the subsidiary. The court will look at the relationship between the companies more widely. [80]”

She makes it clear however, that this is not a restrictive list. She positively quoted Lord Oliver in Caparo Industries Plc v. Dickman [1990] 2 AC 605:

"'Proximity' is, no doubt a convenient expression so long as it is realised that it is no more than a label which embraces not a definable concept but merely a description of circumstances in which, pragmatically, the courts conclude that a duty of care exists [page 633]."

What had happened however, is that these criteria have hardened throughout Thompson, AAA v Unilever and Okpabi as courts determine how to find evidence of parent company control. Briggs found that one of the few mistakes of the trial judge was “imposing a straitjacket derived from the Chandler case. [60]” Rather, since there is “no limit to the models of management and control which may be put in place within a multinational group of companies… I would be reluctant to seek to shoehorn all cases of the parent’s liability into specific categories of that kind, helpful though they will no doubt often be for the purposes of analysis. [51]” 

As acknowledged by Briggs, analysis and consistency will probably lead to the Chandler criteria (and subsequent iterations) continue to be used as a stepping-off point, however future first-instance judges should no longer view themselves bound to accept these as the only means of determining the likelihood of a duty of care arising. 

3. The size of a company’s operations does not dilute a duty of care

Briggs‘s judgement reflects Sale’s dissent in Okpabi, in which he disagreed that the scale of a company’s operations should necessarily be a factor precluding the finding of control or proximity. Looking by analogy at the Chandler case, Briggs said it was “difficult to see” why making a bad practice part of group-wide policy would diminish the responsibility of a parent “if the unsafe system of work, namely the manufacture of asbestos in open-sided factories, had formed part of a group-wide policy and had been applied by asbestos manufacturing subsidiaries around the world. [52]”

In Okpabi, while dismissing the claimant’s appeal, Lord Justice Simon endorsed the warning of Justice Cardozo in Ultramares Corpn v Touche (1932) 174 NE 441 against the danger of exposing defendants to “a liability in an indeterminate amount for an indeterminate time to an indeterminate class (p. 44).” According to the first instance judge in the Okpabi case, applying Cardozo’s reasoning meant that the sheer size of Royal Dutch Shell mitigated against finding liability: “In my judgment, that is the antithesis to proximity or neighbourhood. There are 1,366 other companies in the Shell Group, and the service and operating companies amongst that number perform activities in 101 different countries [114].” However, Lord Justice Sales dissented on this point: 

“I do not think that the simple matter of the sheer size of the Shell group can be an answer to the present claim: why should the parent of a large group escape liability just because of the size of the group, if the criteria for imposing a duty of care are satisfied for a number of companies in the group, while the parent of a smaller group (e.g. with one subsidiary) has a duty of care imposed on it when precisely the same criteria are satisfied in relation to its subsidiary? [172]”

This point links with the next concerning how much stock should be placed in publicly accessible group-wide policies and guidelines. 

4. Public-facing group-wide policies and guidelines alleging group control are potentially sufficient as a basis to argue a case of parent company control 

At paragraph [61], Briggs pointed to Vedanta’s published documents concerning their standards of environmental control over the actions of subsidiaries, and how they implemented these standards, as sufficient evidence that a duty of care may be demonstrable at trial.  There has been dissent in past cases regarding the evidentiary importance of public-facing group-wide policies and guidelines, including policies making CSR-style promises of environmental and human rights compliance. 

Lord Briggs firmly rejected the suggestion that there was a general principle that group-wide policies and guidelines would never cause a parent to incur a duty of care in respect of the activities of a particular subsidiary [52]. He gave the example of group guidelines that may contain systemic errors, which in turn cause subsidiaries to cause environmental damage when implemented.

Perhaps the most interesting part of this judgment is the potential Briggs explicitly pointed out of parent companies being held to their public commitments of social and environmental responsibility: 

 “Similarly, it seems to me that the parent may incur the relevant responsibility to third parties if, in published materials, it holds itself out as exercising that degree of supervision and control of its subsidiaries, even if it does not in fact do so. In such circumstances its very omission may constitute the abdication of a responsibility which it has publicly undertaken. [53].”

This is a strong turn away from Lord Justice Simon’s finding in Okpabi, which relegated evidence from this style of public-facing document as only “published for the purpose of informing shareholders and regulators about the Shell Group businesses. Such statements must be read in their proper context [120]… All this is as one might expect of best practices which are shared across a business operating internationally [121],” and so dismissing their evidential value as to finding a duty of care. 

Briggs now has re-defined that ‘proper context’. The implications of this passage for future litigation is potentially massive. Parent companies in many jurisdictions have made soft, PR-friendly commitments to environmental and social standards. On the face of this passage, communities impacted by the subsidiary of a UN Global Compact signatory could potentially sue them for failing to honour the public commitments made to undertake effective due diligence. 

B. Access to justice as the jurisdictional hook

The Court made it clear that the issue of access to justice for the claimants was not due to any deficiencies with the Zambian courts, which the Court considered completely capable of ensuring a just trial and handling a large group claim. Rather, the Court still found that access to justice in Zambia was jeopardised for a group tort claim for two reasons: the claimants had no prospect of funding the claims in Zambia because Zambian law does not permit conditional fee agreements, and (according to the evidence available to the first instance judge) no law firms in that jurisdiction have the requisite resources or experience to properly represent the group claim. 

The Supreme Court differed from the lower courts concerning the importance of Article 4.1 of the Recast Brussels Regulation (which confers a right on any claimant to sue an English domiciled defendant in English courts) when it comes to settling the jurisdictional question.[1] In these cases, to avoid the risk of conflicting judgements England will usually be a proper place to bring a claim for both the parent and the non-domiciled subsidiary. 

The lower courts, including the first instance judge, considered this mandatory provision a ‘trump card’ to which all other considerations regarding forum should cede, however the Supreme Court found this was not the case, rather it is one consideration among others to be considered [82].  Claimants have a choice when contemplating which jurisdiction they ought to bring a claim: whether to run the risk of irreconcilable judgements by having parallel proceedings in England and Zambia, or avoiding that risk by suing both defendants in the same proceedings and jurisdiction [83]. 

In this case, Vedanta agreed to submit to the jurisdiction of the Zambian courts, and all the other connecting factors (the location of the harm, nationality of claimants, location of documents and other evidence, competency of the courts and their knowledge of the applicable Zambian law) point to Zambia being “overwhelmingly the proper place for a claim to be tried” [85]. If this were the whole story then Article 4 would not be a trump card to anchor the case in England, and the weight would fall to Zambia being the most appropriate forum. If this were the whole story, the Court would have granted the appeal and declined jurisdiction to the claimants. However, because of the fore-mentioned overriding issues of access to justice, in this case England was determined to be the appropriate forum. This stance is consistent with previous positions of the court and English common law: the same exception to the forum non conveniens principle was demonstrated in The Vishva Ajay [1989] 2 Lloyd’s Rep 558 (QB) [560] in which the court denied to stay proceedings in England because of the possibility of substantial injustice in the natural forum (India). 

This is significant, because it shows the cognisance of the Court to the importance of material access to justice. This is a fundamental hurdle to claims by communities without the resources necessary to launch expensive, prolonged suits. Without appropriate fee-arrangements, these claims would not be brought, and accountability for harms perpetrated against the poorest communities would continue to be denied.

Conclusion

Today the UK’s highest court drew a bright red line between (ostensibly) soft CSR commitments and a company’s duty of care to abide by those commitments.  Whether courts take full advantage of the opportunity provided by the Supreme Court in this case remains to be seen, however on a number of fronts, there is now more reason for optimism for those seeking to hold parent companies accountable for extraterritorial harms. 

The previous restrictive approach taken by the courts regarding finding a ‘triable’ case during initial jurisdiction proceedings appears to have been broadened. The Court has however made it clear that the EU regulations regarding jurisdiction are not the catch-all previously envisioned, but rather the courts must weigh all the relevant issues before determining jurisdiction. This is not necessarily a bad thing for potential claimants: group tort claims are being brought to the UK not because of its sunny weather, but often rather because of the availability of fee arrangements that would allow for high-magnitude group claims (such as conditional fee agreements, as discussed in Lungowe and Ors. v Vedanta Resources Plc and Konkola Copper Mines Plc [2017] EWCA Civ 1528 at [125], [179]) against defendants capable of meeting the financial penalty. The Court has made it clear that even if the natural forum is capable of handling a claim in every other way, claimants may seek the service of English courts for the appropriate fee arrangements alone. 

Next is the real test, as for the first time a UK company will face trial and potentially accountability in the UK for the environmental harms associated with operations of its foreign subsidiary.  

[1] Article 4.1: “Subject to this Regulation, persons domiciled in a Member State shall, whatever their nationality, be sued in the courts of that Member State”

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: Benjamin Thompson is a PhD candidate in business and human rights at Tilburg Law School in the Netherlands. His PhD research deals with the effects of the UN Guiding Principles on Business and Human Rights' endorsement of operational level, non-judicial grievance mechanisms and their role in improving access to remedy. He recently published an article for Utrecht Law Review’s Special Issue on Accountability of Multinational Corporations for Human Rights Abuses which discussed the roles the new Dutch multistakeholder initiative with the Dutch banking sector might play in improving banks’ performance with respect to human rights.

In November of last year the Asser Institute offered me the opportunity to take part in a roundtable on the Dutch Banking Sector Agreement (DBA), as part of their Doing Business Right Project. Signed in December 2017, the DBA is a collaboration between the banking sector, the government, trade unions and civil society organisations (CSOs), all based within the Netherlands: the first of its kind. It focuses on banks’ responsibility to respect human rights, as stipulated in the UN Guiding Principles on Business and Human Rights (UNGPs) and OECD Guidelines for Multinational Enterprises (OECD Guidelines), within their corporate lending and project finance activities. The DBA has been something of a hot topic in business and human rights circles. However, it has not yet published a public monitoring report, making any evaluation of its performance at this stage difficult. During the roundtable, we discussed the role of the DBA as a potential means to improve the practices of Dutch banks with respect to human rights. A key challenge identified from this discussion, as reported here, was the various ‘interpretive ambiguities inherent in the UNGPs’. A key conclusion was that ‘further dialogue is required... to ascertain what conduct on the part of the banks is consistent with international obligations’.

This is not a unique conclusion to arise from multistakeholder discussions on banks and human rights; the discussion often focuses on what financial institutions are required to do to meet their responsibility to respect human rights under the UNGPs. So much so that questions concerning implementation or evaluation are often left by the wayside. As a result, when presenting my research on the DBA for the Utrecht Centre of Accountability and Liability Law’s Conference on ‘Accountability and International Business Operations’, published here, I decided to focus on how the DBA had responded to those key points of friction where there is the greatest disagreement between how different stakeholders conceive banks’ human rights responsibilities. This blog post seeks to build on this previous entry, hopefully without too much repetition.

Banks and Human Rights

So, how do the UNGPs apply to banks? Well, there is hardly a dearth of initiatives set up with exactly that question in mind. We have had various OECD initiatives providing analysis on banks’ human rights responsibilities, the UN Environmental Programme’s Financial Initiative, the OHCHR and UN Working Group on transnational corporations and human rights’ pronouncements on this matter, the Thun Group’s discussion papers (2013, 2017a and 2017b) on the UN Guiding Principles and now the DBA. While some have pointed to the interpretive ambiguities within the UNGPs as themselves preventing any emerging consensus, and I am certainly not denying there are interpretive ambiguities (there are), I would suggest this is not, in practice, the key challenge in banks developing practices consistent with the UNGPs. Banks’ interpretation of the UNGPs is largely eclipsed by their own preconceived understandings of their existing due diligence processes with respect to social and environmental risks (E&S due diligence), which originate before the UNGPs and are arguably rooted more robustly in a market-based paradigm. While banks have, at times, expressed concerns over whether their existing E&S due diligence procedures can adequately incorporate the full range of behaviour required under the UNGPs,[1] there has been a considerable effort amongst some banks to interpret the UNGPs in line with their existing practices.

This is perhaps best illustrated in the Thun Group’s 2017 discussion papers which dealt with questions as to how the UNGPs applied to banks, in particular how banks should understand their involvement in human rights impacts related to their financing activities. The paper suffered from various deficits of interpretation (that banks cannot contribute to human rights harms, they have no role in remedy, due diligence is largely limited to whether and how to approve a financial transaction etc.). The paper was such an affront to the UNGPs that it prompted John Ruggie, the main architect of the UNGPs, to write an open letter pointing at many of these failings. A representative of the Thun Group, Christian Leitz responded to say the paper was an ‘industry perspective’ and that he would welcome Ruggie and other stakeholders’ views in order to foster a discussion. Ruggie responded stating that many of the (quite stark) failings of the Thun Group paper to encapsulate the intention of the UNGPs did not amount to rival ‘opinions’ or ‘interpretations’ but were ‘factually incorrect’ and that it would be difficult to have a dialogue based on ‘alternative facts’.

While it might be true that the banks interpretations are ‘factually incorrect’ or, as David Kinley put it, that the recent Thun Group paper is simply an attempt by banks to dodge their human rights responsibilities all-together, how are we to understand this misalignment between banks’ understanding of the UNGPs and the logics of the UNGPs themselves (assuming ‘we’ share a kinship with the business and human rights project)? One can say that the Thun Group is failing to take its human rights responsibilities seriously; one can probably also cast that claim to include a much broader range of business enterprises and industries. However, to the extent to which businesses are not accepting and internalising the norms of the UNGPs, it is perhaps equally accurate to say both that businesses are failing to meet the UNGPs and that the UNGPs are failing in their ‘norm-building’ mission, with its key objective of ensuring business enterprises accept their responsibility to respect human rights as part of their business practices. Any serious proponent of the ‘business and human rights project’, must therefore understand the need to identify where the tensions are between industry perspectives and the UNGPs, and seek to evaluate which initiatives (if any) are successful (or partly successful) in bringing business enterprises’ understanding of their human rights responsibilities closer to that understood in the UNGPs. It is from this question of the extent to which banks are moved to a greater alignment with the normative requirements of the UNGPs that I will evaluate the Dutch Banking Agreement (DBA) as a multistakeholder agreement.

Given the backdrop of divergences over attitudes to banks and human rights, the DBA plays an important role. It is the only initiative which has actually reached any output on banks responsibility to respect human rights which is based on consensus. The initiatives cited above stem from organisations which represent a single type of stakeholder (States or banks), which may or may not consult other stakeholders but never require multistakeholder consensus for an output to be reached. Below is an analysis in how these divergences have been bridged somewhat in the text of the DBA, according to five identified divergences between the UNGPs and banks E&S due diligence processes. The description of banks’ perspectives with respect to their own E&S due diligence processes and human rights in the subsequent sections are principally taken from financial institutions’ responses to an OECD survey on environmental and social risks and the Thun Group papers: the Thun Group represents some of the world’s largest banks.

1.     ‘responsibility to respect’ vs ‘opportunity to affect’

While the UNGPs understand the actions businesses must take with respect to human rights as one of ‘responsibility’, E&S due diligence is more often understood as good business or ‘opportunity’.[2] This not only has connotations for both how banks see the nature of their practices with respect to human rights but also how they define the content of what is required. For instance, the contexts in which banks take action is often understood by the extent to which they have the opportunity to enact change in a client’s behaviour, rather than their responsibility for an impact (e.g., causing, contributing, directly linked, no link). Banks are happy to include ‘forward looking’ risk mitigation measures as part of their practices but are often reluctant to accept that they should take actions which imply a greater responsibility for the impact on their part. When understanding the application of the UNGPs, banks have often not considered themselves to be in even the lowest category of involvement (directly linked) in relation to human rights harms connected to their activities, preferring to consider themselves as not involved or ‘indirectly linked’.[3] Some have completely ruled out the relevance of remedy.[4] Banks have received more approval when they have discussed what they ‘could do’ compared to what they ‘should do’, where they are notably more ambitious. This led to a much more welcomed reaction to the first Thun Group paper in 2013, which focussed on operational principles, compared to more criticised Thun Group papers in 2017, which focussed on foundational principles.

The DBA commits adhering banks to meeting the responsibility to respect human rights, as understood in the OECD Guidelines and UNGPs (article 1). Adhering banks have all signed declarations of adherence to the Agreement stating that they are bound by the Agreement. However, as some of the requirements of the DBA go beyond the responsibility to respect (e.g., article 10 on Sustainable Development), it is not always clear which aspects of the DBA the stakeholders consider to be part of their responsibility to respect human rights and which arise solely from the Agreement itself.

One particularly progressive element of the DBA is its inclusion of remedy, referred to under the article ‘Enabling Remediation’. This article looks at the steps a bank can take to ensure their client’s provide remedy for human rights harms, and it also raises the question of how impacts can be addressed or remediated based on the categories of a bank’s involvement in human rights impacts. However, it omits any explanation of the categories of a bank’s involvement, leaving this to further exploration by a working group, which promises to incorporate guidance provided by the OECD. The findings of the working group are to be integrated into the practices of the adhering banks. Banks are required to have individual complaints mechanisms open to clients and third parties, but the DBA makes clear these are not grievance mechanisms as understood in the UNGPs/Guidelines (article 3.5). Banks seem to need only to report on steps taken to prevent and mitigate impacts in their annual reports used by the DBA’s monitoring committee, covering their implementation of articles 3 (on policies) and 4 (on due diligence) but not article 7 (on enabling remediation).

2.      ‘risks to people’ vs. ‘risks to bank’

E&S due diligence is principally concerned with risks that could present a liability to the financial institution; human rights risks are considered risks to the bank rather than risks to people, although these risks may coincide. This market-based paradigm depends on adverse impacts on a bank’s bottom line as the key incentive for a bank to carry out due diligence, and it also acts as a disincentive for banks to take action where doing so might deprive them of a business opportunity.[5]

When responding to an OECD survey on how financial institutions understand how the OECD Guidelines apply to them, financial institutions were asked what factors influences how much leverage they had. Banks largely identified risks falling under ‘risks to the bank’[6] as the main factors rather than factors that an outsider might see as more linked to the UNGPs understanding of leverage: the ability to influence a situation. Commercial providers of E&S risk information for use in E&S due diligence, such as Reprisk, still view environmental and social risks as those risks to the bank: to a bank's reputation, to banks complying with national law and to a bank’s finances.

The DBA looks to risks to people as the basis for what action should be taken (article 4.2). It recognises that this goes beyond existing E&S due diligence practices, and it expects banks to report on their human rights performance under the UNGPs Reporting Framework which requires that businesses look at impacts on people not themselves. Two occasions where a ‘risks to bank’ lens may enter the Agreement’s implementation is through the cross referencing of initiatives which do adopt this paradigm (the IFC Performance Standards and Equator Principles) and through mentioning that banks terminate their relationships where the client has broken ‘material due diligence requirements’ (article 4.3.b).

There is also reference to a concern over the potential financial implications for banks resulting from more robust human rights practices: the need to produce a ‘level playing field’ internationally (article 4.5.b).  However, at no point is it suggested that banks’ compliance with the DBA is contingent on them not being placed at a competitive disadvantage as a result. Overall, the ‘risks to bank’ paradigm is minimal and the ‘rights to people’ paradigm is kept central to the DBA.

3.     ‘transactional due diligence’ vs. ‘human rights due diligence’

Banks’ due diligence is commonly understood to primarily cover those actions taken by banks up to the point where the transaction takes place as opposed to the full duration of the business relationship as under the UNGPs. The types of measures expected will depend primarily on the type of financial product offered, the type of client and their overall risk profile. Banks have consequently interpreted those terms within the UNGPs/Guidelines which refer to actions moving beyond the client of actions required after the point of transaction narrowly, understanding value/supply chains as limited to their own suppliers[7] and not recognising any role for termination of relationships or remediation.[8] The Thun Group papers introduced ‘new’ terms to the UNGPs – unit of analysis and proximity – which largely sought to reconstruct the UNGPs to fit within this transaction based model, limiting how directly linked a bank was, and the actions a bank should take, to the type of transaction and which member of a corporate group the bank made the transaction with.

The DBA recognises that adhering banks should base what kinds of action they take based on the severity of the (potential) impact rather than the nature of the transaction (article 4.3(a)). The due diligence provisions do not state that actions to identify, prevent and mitigate human rights impacts are limited to the lead up to the transaction, and they expressly require the banks to monitor, track and assess the outcomes of their due diligence. It also stresses the need to look to creative means of exercising leverage (article 9).

The DBA covers many of those aspects of the UNGPs which banks have been reluctant to include in their policies and which have been hitherto overlooked by the Thun Group – termination of business relationships, value chains and remediation – albeit in a more diminished way than some of the other responsibilities under the UNGPs. Value chains are limited to those mapping exercises under the text and decided upon by the parties to the DBA, and identification of impacts in value chains is not expressly part-and-parcel of a bank’s human rights due diligence processes, which are largely limited to actions to be taken with respect to the client (article 4). Termination of relationships is mentioned as a possible action where a client is repeatedly not able or willing to comply with material due diligence requirements, but this is left entirely to the discretion of the bank (article 4.3(b)). Thus, the DBA accepts the need for more than a transactional due diligence approach, adopting an understanding closer to the human rights due diligence approach in the UNGP/Guidelines.

4.     ‘client-only engagement’ vs. ‘stakeholder engagement’

Banks limit themselves primarily to engaging with their client and not external stakeholders, as understood in the UNGPs. Engagement with external stakeholders is often considered the responsibility of the client, not the bank. Unfortunately, client-only engagement plays a dominant role in the DBA. All mention of meaningful consultations with stakeholders is the duty of the client, with banks expected to influence clients to do so, rather than also the responsibility of the bank. The DBA itself seeks to collaborate with the OECD, but does not expressly set up platforms for engagement with rights-holders. Inclusion of the CSOs and unions which are party to the DBA is itself seen as stakeholder engagement, and the CSOs and unions are expected to empower ways of interaction with affected stakeholders (article 12(a)), but this requirement is placed only on CSOs and there is no equivalent requirement on the adhering banks. Within the DBA itself, inclusion of rights-holders appears to depend on representation through the CSOs and unions. The text of the DBA sets up a dispute resolution mechanism, but this is again only open to parties of agreement; the DBA has no grievance mechanism open to external stakeholders to complain about its implementation, despite this being required under the UNGPs (article 13.3).

5.     ‘knowing and withholding’ vs. ‘knowing and showing’

In the UNGPs, there is an understanding that the relationship between civil society and business will move from ‘naming and shaming’ – whereby outsiders shame businesses for human rights impacts – to ‘knowing and showing’ – where businesses themselves understand and deal with their human rights impacts – showing what actions they are taking. However, banks are largely opposed to such a level of transparency, often glossing over any responsibility to ‘account for’ what actions they take publicly, beyond publishing their policies, sometimes citing regulatory rules or client confidentiality as a reason for not doing so.[9]

Client confidentiality plays a dominant role in banks’ reasons for not disclosing their human rights performance. The DBA states that all of the commitments of the banks are subject to law, and disclosure of banks’ actions in pursuance of the DBA’s provisions is limited by client confidentiality and banks’ internal policies (article 14.8(a)). It also states that banks should engage in being as transparent as possible and that the parties should discuss options for greater transparency (article 6.10).

The first and only public output of the DBA to date was legal advice on what forms of information banks could share with the CSOs and the public. It did not limit itself to law, including provisions of loan agreements that banks enter into and market practice. It concluded that individual client information cannot be discussed unless there is the consent of the client, this information is released in compliance with a statutory obligation of disclosure or it is made anonymous. This is likely to significantly impact what banks can ‘know and show’ in the course of their activities and in their reports under the DBA.

The future of the DBA

In this blog, I have focussed on how the DBA may help bridge the current deficit between how banks have traditionally sought to interpret the UNGPs in relation to their activities and the logics of the UNGPs themselves. To the extent the text of the DBA has bridged some of these gaps, the question remains to what purpose. Although it is too early to tell how the DBA will be implemented in practice, in my full article, which this blog is based on, I go into three roles that the DBA might play: regulation, experimentalism, and advocacy.

Regulation depends on ‘rules’ which will require a greater degree of conciseness than is in the UNGPs themselves. In those areas where there is the greatest convergence between the UNGPs and existing E&S due diligence processes, e.g., risk mitigation at the point of transaction, the DBA does have relatively precise requirements. In practice, enforcement of these requirements may, to some extent, be compromised by the DBA’s less-than-ideal enforcement apparatus, as there are some conflicts of interest between the different bodies responsible for the DBA’s implementation.[10]

Experimentalism is particularly relevant for those parts of the DBA where there is less consensus between the parties, e.g., remediation. Experimentalism is based on an iterative and reflexive cycle whereby broadly defined goals and metrics are agreed on, preliminary actions are taken, these actions are assessed against the goals and metrics, and then the goals and metrics are revised in light of lessons learned before the cycle begins again.

Advocacy refers to the DBA’s potential as possibly the only initiative in banking and human rights to result from a genuine multistakeholder consensus to advocate for the uptake of similar norms at the international level. For instance, the outcomes of the remedy working group and the exchange of best due diligence practices is expected to feed into the OECD processes on banking and human rights. This will depend on the DBA not only reaching new normative consensuses but also a) advocating for them internationally and b) demonstrating their added value in practice. While the DBA shows promise, it is yet to be seen what role it will actually play (if any) in the wider business and human rights project.                                        

[1] OECD Working Party on Responsible Business Conduct, ‘Environmental and Social Risk Due Diligence in the Financial Sector: Current Approaches and Practices’ (June 2013), (OECD Survey), p. 53.

[2] Ibid., p. 54.

[3] Ibid., p. 51.

[4] Thun Group, ‘Discussion Paper on the Implications of UN Guiding Principles 13 & 17 in a Corporate and Investment Banking Context’,(January 2017), p. 15.

[5] OECD, ‘Global Forum on Responsible Business Conduct 26-27 June 2013 Summary Report’ (2013), p. 17.

[6] OECD Survey, p. 61.

[7] Ibid, p. 52.

[8] Thun Group 2017 paper.

[9] Benjamin Thompson, ‘The Dutch Banking Sector Agreement on Human Rights: An Exercise in Regulation, Experimentation or Advocacy?’ (2018) 14(2) Utrecht Law Review 84, p.89.

[10] Ibid., p. 96.