The Weekend Essay: On Zambian farmers versus Vedanta

Published by MAC on 2019-04-20
Source: OpinioJuris

Vedanta v. Lungowe Symposium: Beyond Vedanta–Reconciling Tort Law with International Human Rights Norms

Doug Cassel

OpinioJuris - in association with the International Commission of Jurists

19 April 2019

The unanimous jurisdictional ruling of the United Kingdom Supreme Court in Vedanta Resources PLC and another v Lungowe and others, issued April 10, is the most important judicial decision in the field of business and human rights since the jurisdictional ruling of the United States Supreme Court in Kiobel v Royal Dutch Petroleum in 2013.

But the difference between the two cases is night and day: whereas Kiobel drastically curtailed the jurisdiction of US courts, Vedanta confirms and extends a trend in UK courts to expand jurisdiction over transnational business and human rights cases.

Vedanta found jurisdiction in UK courts over a suit by Zambian farmers against Vedanta Resources, a UK parent company, and its majority-owned Zambian subsidiary. The farmers alleged that their health and livelihoods were harmed by water pollution caused by a copper plant owned and operated by the subsidiary in Zambia.

Formally, Vedanta ruled only on jurisdiction: both a UK parent company and its foreign subsidiary can be sued together in the UK, provided there is a “real issue” which is reasonable for a UK court to try against the parent company, at least when there is also a “real risk” that claimants could not obtain substantial justice against the subsidiary in the courts of its foreign jurisdiction.

Equally important as the jurisdictional holding, however, is Vedanta’s exposition of when a parent company owes a “duty of care” for purpose of tort law to persons affected by its subsidiary. As in most recent transnational claims against parent companies in the UK, the issue was not the parent’s vicarious liability for wrongs committed by its subsidiary, but rather the parent’s own, direct liability for negligent supervision of the subsidiary.

In this context the Court refused to be limited by the restrictive, four-part test discussed by several courts of appeal following Chandler v Cape [2012] 1 WLR 3111. Originally tailored to the facts of Chandler, that test held a parent company liable where, in relevant respects, (1) the businesses of the parent and subsidiary are the same; (2) the parent has, or ought to have, superior knowledge; (3) the subsidiary’s system 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 superior knowledge.

Liberating courts from these factors, the Supreme Court announced,

“Everything depends on the extent to which, and the way in which, the parent availed itself of the opportunity to take over, intervene in, control, supervise or advise the management of the relevant operations … of the subsidiary” (par. 49).

This broad supervisory spectrum ranges from the parent’s “taking over” relevant operations to its merely “advising” the subsidiary. Depending on the extent and manner of the advice, simply advising a subsidiary can trigger a duty of care by the parent toward persons affected by the subsidiary. Persons affected may include, not only employees of the subsidiary, but also residents of communities affected by its operations (as in Vedanta).

Even group-wide corporate policies may sometimes suffice to establish a parental duty of care. Counsel for Vedanta argued that a parent could never incur a duty of care toward persons affected by its subsidiary “merely by laying down group-wide policies and guidelines, and expecting the management of each subsidiary to comply with them.” But the Court responded that it was “not persuaded that there is any such reliable limiting principle.” Corporate group guidelines can contain “systemic errors” which, if implemented by a subsidiary, could harm third parties (par. 50).

Turning to the case at hand, the Court found it “well arguable that a sufficient level of intervention” by Vedanta may be shown at trial, after “full disclosure” of relevant internal documents and communications. The Court based this finding on:

“[T]he published materials in which Vedanta may fairly be said to have asserted its own assumption of responsibility for the maintenance of proper standards of environmental control over the activities of its subsidiaries, and in particular the operations at the Mine, and not merely to have laid down but also implemented those standards by training, monitoring and enforcement” (par. 61).

The message: the more a parent company sets policies for subsidiaries, and implements them by training, monitoring and enforcement, the more likely it will owe a duty of care to persons harmed by the subsidiary. Of course, the duty of care is only a threshold issue. Claimants must still show negligence, harm, causation, and damages.

Nonetheless, establishing a duty of care can, as in Vedanta, overcome a motion to dismiss for lack of a “well arguable” claim against the parent, help to overcome a key objection to jurisdiction over the subsidiary, and – crucially – open the door to discovery of potentially revealing internal company documents and communications. For purposes of common law torts, then, Vedanta is an important victory for claimants.

But for purposes of international norms on the responsibility of business to respect human rights, Vedanta is problematic. By basing a duty of care – leading to potential liability — on how closely a parent company supervises its subsidiary, Vedanta incentivizes parent companies to take a hands-off approach. The fewer group-wide policies they adopt, and the less they attempt to implement them, the less likely they are to owe a duty of care. The safest path for them to avoid liability is to see no evil and hear no evil.

This incentive is in tension – indeed, contradiction – with international norms on business and human rights. The UN Guiding Principles on Business and Human Rights call on business enterprises to respect human rights “wherever they operate” (Principle 11, Commentary), regardless of whether “through a corporate group or individually” (Principle 14, Commentary), and regardless of “ownership or structure” (Principle 14). Enterprises should avoid causing or contributing to adverse human rights impacts through their own activities – whether by action or omission – and should seek to prevent or mitigate adverse impacts to which they are directly linked through their business relationships (Principle 13 and Commentary).

Enterprises should therefore adopt a policy stipulating their human rights expectations of subsidiaries (among others); communicate that policy to subsidiaries; and reflect it in operational policies and procedures which embed it throughout the business enterprise (Principle 16). Among those procedures, enterprises should adopt a “human rights due-diligence process to identify, prevent, mitigate and account for how they address their impacts on human rights” (Principle 15 (b)).

In other words, the Guiding Principles recognize the responsibility of parent companies to adopt human rights policies and to actively supervise implementation of those policies by subsidiaries. This is precisely the sort of supervisory activity which, under Vedanta, is likely to lead a common law court to recognize a duty of care of a parent company toward persons affected by its subsidiaries.

Many other international instruments impose human rights supervisory responsibilities on parent companies. For example, the OECD Guidelines for Multinational Enterprises, which recognize the business responsibility to respect human rights, “are addressed to all the entities within the multinational enterprise (parent companies and/or local entities)” (Guideline I, par. 4). They “extend to enterprise groups, although boards of subsidiary enterprises might have obligations under the law of their jurisdiction of incorporation. Compliance and control systems should extend where possible to these subsidiaries. Furthermore, the board’s monitoring of governance includes continuous review of internal structures to ensure clear lines of management accountability throughout the group” (Guideline II, Commentary, par. 9).

In a globalized economy dominated by multinational companies, typically operating through subsidiaries, such international human rights norms sensibly recognize that parent companies have a responsibility to adopt group-wide policies and to monitor and enforce them.

Yet, under Vedanta, if parent companies endeavor to carry out these responsibilities, they become more – not less – exposed to potential common law tort liability. How can this tension between tort law and international human rights norms be eased?

The answer need not and should not undo Vedanta. Instead, the tension could be eased by further evolution of the common law of torts. A next step could and should be to hold parent companies liable for failing adequately to supervise their subsidiaries, as required by the UN Guiding Principles, which are widely endorsed by States, including the UK. Tort law could thereby align with human rights law. By recognizing a parent company’s liability for failure to supervise its subsidiaries, Vedanta’s perverse incentive would be removed. Rather than evade potential liability by adopting a hands-off approach, a parent company would face greater risk of liability if it failed to adopt and implement group-wide human rights and environmental policies and procedures.

Doug Cassel is an Emeritus Professor of Law at Notre Dame Law School.