Access to courts for corporate accountability: recent developments
Published by MAC on 2003-08-03Access to courts for corporate accountability: recent developments
by Richard Meeran
A series of three cases litigated over the last seven years have developed English law with respect to access to justice for overseas victims of multinational corporations (‘MNCs’) and multinational accountability. All three cases - referred to here as the Thor case, the RTZ case and the Cape PLC case and described more fully in the appendix to this article - are compensation claims brought against the parent company of the multinational in its home courts in England.
The three cases have been heard by the Court of Appeal seven times and the House of Lords twice, mainly on issues of jurisdiction. Of those nine appearances, only two defeats were sustained by the claimants, in the Court of Appeal, and both of those were overturned by the House of Lords. The cases seem increasingly to have encouraged a ‘sea change’ in the attitude of the English courts towards these types of cases. The intensity of the litigation solely on the issue of venue highlights what is at stake for MNCs and the claimants merely by the claims being allowed to proceed in England.
The most recent and definitive judgment was given by the House of Lords in a case brought by more than 3,000 South African asbestos victims. This was based squarely on the principle laid down earlier by the Lords in the case of Connelly v Rio Tinto Plc, namely that, in a complex case, if a claimant could establish that there was no funding available to obtain legal and expert representation in his/her local courts, then the claim would be allowed to proceed in the English court.
The claimants’ reasons for suing the parent company in the three cases, rather than the local operating subsidiaries, reflect the difficulties faced by victims of MNCs generally and can be summarised as follows: MNCs invariably organise themselves to protect the financial position of the parent company (see ‘corporate veil’ below); local subsidiaries are insolvent or at least not worth suing and/or uninsured; the claimants have no means of obtaining practical access to justice in their home courts; workmen’s compensation schemes in place at home often preclude claims against an ‘employer’.
Forum non conveniens
Where a defendant is based in England, the English courts have jurisdiction to deal with the claim, as is the case throughout the European Union, by virtue of Article 2 of the European Union-wide Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters of 1968. However the ‘forum non conveniens’ principle has been developed by the courts of England and the US to halt a claim brought (properly) within their jurisdiction, on the grounds that there is a ‘more appropriate’ forum (venue) elsewhere. The rationale is that the principle should ensure that a case is tried in the jurisdiction with which it has the closest connection, or rather that courts should avoid infringing the sovereignty of other states by exceeding their jurisdiction. Forum non conveniens, described by one of its eminent architects as ‘one of the most civilised of legal principles’, has been the main legal battleground in the three cases so far.
‘Forum Shopping’
The pejorative label ‘forum shopper’ has often been applied to foreign claimants attempting to sue in the United States. Analysis of the reality has demonstrated this label to be unwarranted. In the cases described below, the reason for suing in the UK has been to obtain access to justice. The position has been stark: either the claimants were to be permitted to sue in England or they could not sue at all. The notion that the claimants’ primary objective in suing in England is to get more money is simply wrong.
A City lawyer, quoted in a Lloyds of London statement following the July 2000 decision of the House of Lords in the Cape case, stated: ‘It is not that this decision has suddenly increased everyone's liabilities, it has just made it more likely that the cases will be heard in England…’ This revealing statement thus effectively acknowledged that whilst multinationals operating in developing countries may have been legally liable, in theory, for injuries to workers, this theoretical liability was previously ignored with impunity because the victims had no means, in practice, of enforcing their rights in their local courts, invariably due to lack of funding to pay lawyers to represent them. It also highlights the reliance previously placed by MNCs on being able to avoid justice by utilising the forum non conveniens procedure.
‘Reverse forum shopping’
By seeking to displace a claim from a place where it is natural to sue - the MNC domicile - to a venue where the MNC knows the claimants will probably be denied access to justice altogether (certainly not with anything like the ‘equality of arms’ provided for under Article 6 ECHR), it seems equally justifiable to accuse the MNCs of ‘forum shopping’. By permitting an MNC to pick and choose when and where it wishes to be sued, the courts are effectively sanctioningforum shopping by MNCs, thereby making a mockery of forum non conveniens.
It was for this reason that Evans LJ, in the first Court of Appeal in the Cape case described Cape’s application as ‘almost a case of forum shopping in reverse’. In its intervention before the House of Lords, the Republic of South Africa (‘RSA’) submitted:
Cape will be in the position, in future actions by South African claimants, to elect English or South African jurisdiction as its sole option, without regard to the interests of justice overall or the public interest. It is undesirable as a matter of public policy that one party to litigation should be able to elect its forum in this way, when it could decline so to elect in an identical future case. It is not in the interests of justice to allow such arbitrary ‘forum shopping’, by either party to litigation.
Nevertheless, in their judgment in the Cape case, the House of Lords overruled the Court of Appeal on this point, so that the practise of ‘reverse forum shopping’ by a defendant, appears to have been expressly sanctioned. However, as a result of the terms of the Cape and Connelly decisions, the prospect of defendants being able to benefit from this device in the English courts has, for practical purposes, been significantly reduced.
Article 2 Brussels Convention
Perhaps even more importantly, as a result of the July 2000 decision of the European Court of Justice in the Group Josi case, the device of forum non conveniens is all but ‘dead in the water’, as far as UK-based defendants are concerned. Article 2 of the 1968 Brussels Convention (to which all EU states are party) provides that a defendant ‘shall’ be sued in its domicile. However, the Court of Appeal had previously held, in the Harrods (Buenos Aires) Ltd case, that this did not preclude a stay of proceedings, brought against a UK-domiciled defendant, where the alternative venue was in a state which was not a contracting party to the Convention (such as South Africa). On the other hand, it was due to Article 2 that Cape was unable to prevent the continuance of claims brought against it in England by 4 Italian asbestos victims, formerly employed in its Turin factory.
Article 2 was raised by the claimants in the Cape case, who contested the Harrods ruling. Lord Bingham, who had been a member of the Court of Appeal in the Harrods case, indicated that if the claimants had not succeeded on their forum non conveniens case, the Court would have referred the matter to the European Court of Justice. There, in view of the Group Josi decision, it seems very likely that Article 2 will be held to preclude the application of forum non conveniens altogether where a defendant is domiciled in the EU.
Hague Conference on Private International Law
A word of caution however: behind the scenes negotiations and drafting have been ongoing for a few years now towards a global convention on jurisdiction, the ‘Hague Conference’. Whilst positive improvements have been made to the current position for example in the area of ‘tag’ jurisdiction, to ensure that oppressive dictators, such as Pinochet, cannot easily evade justice, forum non conveniens has effectively been allowed back in, largely on the insistence of the US government. It is unclear if and when the new Hague Convention will come into effect. Therefore, for the time being at least, MNCs have effectively been stripped of forum non conveniens as layer of defence.
Cases in other jurisdictions
A recent decision of the US Supreme Court ended the long running forum non conveniens dispute in a human rights case against multinational corporation, Shell. The US courts have given the go-ahead for the claims, brought by the relatives of Ogoni opponents of Shell’s oil operations in Nigeria, executed by the Abacha regime. The relatives include the brother of Ogoni leader, activist and writer, the late Ken Saro-Wiwa. Shell had argued that the claims ought instead to be tried in England or the Netherlands, where its headquarters are situated.
The case was brought under the 1789 Alien Tort Claims Act (‘ATCA’), a statute which enables the US courts to exercise extra-territorial jurisdiction over specified claims, including particular categories of human rights violation. Essentially, the claimants allege that Shell was jointly responsible for the executions of the activists, in that it tacitly endorsed the actions taken by the Nigerian military regime against the Ogoni activists and failed to exercise its influence to halt the executions.
However, a case brought on a virtually identical legal basis, by Burmese claimants against oil company Unocal, has been halted by the California courts on the grounds that it ought to be tried in Myanmar. The claimants allege that Unocal conspired with the military regime in human rights violations, such as forced labour and torture, surrounding the construction of a pipeline.
Other countries may have no equivalent of the ATCA, but that has not prevented similar landmark cases against multinationals elsewhere. Claims brought in Australia against mining company BHP, by 30,000 Papua New Guineans whose land had been polluted, overcame the venue hurdle and were settled for substantial damages, including costs of clean-up.
The ‘corporate veil’ barrier
Jurisdictional barriers having been largely overcome in the UK cases, the issue of whether or not MNC parent companies will be assigned with a legal duty of care towards those affected by their overseas operations remains the only real barrier between the claimants and justice. Having said that, there also remains a concern that, in the case of smaller MNCs, attempts might be made to avoid payment of compensation by the disposal of assets or shares by the corporate entity being sued. The problem is best illustrated by considering the Rio Tinto and Cape corporate trees. The parent companies, at the top of the trees own, directly or indirectly, all (in the case of Cape) or the majority (in the case of Rio Tinto) of the shares of the subsidiary companies in the rest of the group. Notwithstanding that the subsidiaries are actually divisions of the group business, each is actually a separate legal entity.
Legal liability of limited companies does not conventionally attach to their shareholders, save in exceptional circumstances (e.g. fraud) or where the company in question can be shown to be a ‘sham’ or the agent of a shareholder. By organising their structure as separate legal entities, MNCs have been able to depend on this separation of legal identity (‘corporate veil’) between subsidiaries, even though, somewhat ironically, at the time it was formulated, it was unlawful for one company to own shares in another.
So rigid have the courts been in upholding the corporate veil that in Adams v Cape, the Court of Appeal refused to ‘pierce’ it, even though it was found that ‘Cape ran a single integrated mining division with little regard to the corporate formalities as between members of the group…’.
And yet in the eloquent and powerful words of the submission of the Indian government in the Bhopal case:
Key management personnel of multi-nationals exercise a closely held power which is neither restricted by national boundaries nor effectively controlled by international law. The complex corporate structure of the multi-national, with networks of subsidiaries and division, makes it exceedingly difficult or even impossible to pinpoint responsibility for the damage caused by the enterprise to discrete corporate units or individuals. In reality, there is but one entity, the monolithic multinational, which is responsible for the design, development and dissemination of information and technology world-wide, acting through a forged network of inter-locking directors, common operating systems, financial and other controls. In this matter, the multinational carries out its global distribution and marketing systems, financial and other controls. Persons harmed by the acts of a multinational corporation are not in a position to isolate which unit of the enterprise caused the harm, yet it is evident that the multinational enterprise that caused the harm is liable for such harm.
The multinational must necessarily assume this responsibility. For it alone has the resources to discover and guard against hazards and to provide warnings of potential hazards.
A legal ‘duty of care’ for MNC parent companies?
Whereas claims against Unocal and Shell in the US have been based on infringements of human rights law, the Thor, Rio Tinto and Cape cases have been based on more conventional tort/negligence principles. The key issue raised is whether an MNC parent company owes a legal duty of care to those injured by its overseas operations. The first Court of Appeal in the Cape case described the duty of care issue as a ‘substantial question of law’.
There is presently no precedent on this apparently controversial issue of the existence of a ‘duty of care’ owed by an MNC parent to those affected by overseas operations. Whilst the potential adverse financial consequences for MNCs are obvious, there seems no justifiable reason, in principle, why the tortious liability of an MNC should be any less than that of any other legal individual.
Furthermore, as noted above, given that, at the time the concept of limited liability was formulated, it was unlawful for one company to hold shares in another, it is arguable that the separation of corporate legal identities should not be a barrier against the imposition of a duty of care across corporate boundaries.
Donoghue v Stevenson was novel in its time, but the concept of ‘product liability’, by which a manufacturer is assigned with a duty of care towards consumers of its products, is now firmly established: By analogy, it can be argued that a parent company which designs, orchestrates and controls a worldwide ‘process’, comprised of interdependent integrated divisions, and which appreciates the risks to which workers employed on a hazardous process are being exposed, should be assigned with a duty to take reasonable steps to protect workers against those foreseeable risks. Where a parent company is responsible for health and safety and medical policy and for supervising and monitoring those aspects across a group, ‘assumption of responsibility’ is likely to result in the imposition of a duty of care.
‘Distributive Justice’
As well ‘proximity’ and ‘foreseeability’ (of harm), ‘reasonableness’ and ‘fairness’ are also key factors in determining whether or not a legal duty of care was owed by a defendant. The relevance of the conduct and motives of the defendant and the issue of double standards in determining whether a legal duty of care was owed and the nature and scope of any duty is reinforced by the embracing of the ‘distributive justice’ approach into English law of negligence.
This appears to have started with the decision of the Court of Appeal in Frost v Chief Constable of South Yorkshire Police. There had been a public outcry at the decision that, whereas police officers suffering from Post-Traumatic Stress Disorder (PTSD) following their involvement in a football stadium disaster were considered to have been owed a duty of care, relatives of victims of the tragedy were not. By declining the police officers' claims, the House of Lords was engaged in a practical attempt to preserve the general perception of the law as a system of rules which was fair between one citizen and another. The upshot of the Lords’ ruling was that to achieve this objective, the situation must be viewed from the perspective of the ‘man on the Underground’. One wonders what such a person might make of the suggestion that MNCs such as Cape and Thor might be able to avoid liability to their South African workers, by structuring themselves in such a way as to take full advantage of the corporate veil. ‘Double standards’
Interlinked with the above approach to legal liability based on fairness, is the principle that practising ‘double standards’ in relation to health and safety is morally indefensible and should be legally indefensible too. It is frequently suggested, on behalf of MNCs, that MNCs need only comply with the laws of the countries in which they operate. However, whether or not a risk of injury ought to have been foreseen by a defendant does not depend on local laws or regulations. The liability of a parent company based in England ought to be judged against its knowledge and experience of what was required to be done to protect against risks in England.
If standards are less stringent overseas, it would be entirely artificial to base liability on such lesser standard if in fact the MNC had a greater awareness of the risks, based on the practices and knowledge acquired at home. Consequently whilst compliance with local standards may ensure no prosecutions for contravention of local laws, they cannot and should not be a defence to a claim brought in negligence. MNCs themselves appear to recognise the moral obligation not to apply double standards and to have stated their policies accordingly.
Continuing to practice ‘double standards’ should be unattractive, provided the levels of compensation and costs are sufficiently high to outweigh any financial incentive to cut corners on health and safety expenditure. Although the compensation claim brought against Thor in England was settled in April 1997 for £1.3 million, an earlier criminal prosecution, in South Africa, of the subsidiary and its managers, had resulted in a £3,000 fine. Multinationals might well comment that the levels of the fines make it hard to justify to shareholders significant expense on health and safety.
Levels of compensation
MNCs assert that claimants living in developing countries, where the cost of living is lower, should be paid less compensation since their needs are less. The levels of compensation awarded by courts in developing countries are indeed significantly lower. Indeed if one compares the levels with those awarded, for instance, by the US courts, the differentials are astronomical. But this has nothing to do with need.
An important function of civil compensation should be to act as a deterrent, that is, to provide a sufficient disincentive against future infringements by the defendant in question or others. Paltry levels of damages paid to claimants in developing countries will have the reverse effect. From a commercial perspective it creates an ‘unlevel playing field’ between MNCs depending on where they operate. There would be an incentive for multinationals to employ more people in developing countries because of the different levels of compensation. In any event, the law in England seems quite clear: Quantification of damages is a matter of procedure to be determined in accordance with the law of the state which is trying the case.
Desirability of suing MNCs at home
It has been suggested, on behalf of MNCs, that holding MNCs accountable at home by reference to home standards undermines the legal system of the local state and effectively amounts to an infringement of its sovereignty. The inability to obtain practical access to justice in local courts and the location of the MNC domicile are ample justification for bringing these claims in the courts of the MNC home base.
In its written representations to the House of Lords in the Cape case, the RSA stated that:
The South African public interest is in the speedy and fair determination of these proceedings, not their being determined in its courts. There is no public interest in requiring the new constitutional order, with the financial pressures, to bear the costs of litigation arising from the operation of an English domiciled company under the old constitutional regime. Conclusion
Starting from the premise that the objective is to develop a system whereby multinationals can be held legally accountable for damage and injuries caused, wherever in the world they happen to be operating, where does the above review lead to in terms of a proposal for the way forward?
The key obstacle to accountability is access to justice. It is primarily due to the vast disparity of access to justice that the multinationals want the cases heard in the developing country local courts whereas the victims want the cases heard in the multinational’s home courts. The key factor in relation to access to justice is funding. In many developing countries there is no legal aid system and public interest lawyers operate on ‘shoe-string’ budgets. They would simply be unable to run a case on anything like a ‘level playing field’ against a well-resourced multinational. Similarly where, as in South Africa for instance, it is lawful for lawyers to act on a ‘no win no fee’ basis, there is little incentive for lawyers to take on a complicated, expensive and protracted legal action against a multinational defeat could ultimately lead to financial ruin.
The funding problem is exacerbated by the corporate veil obstacle. If it was possible, in practice, to sue multinational overseas subsidiaries, then these would be the obvious target for legal action. Since, in most legal systems, an employer owes a legal duty of care to ensure the safety of its worker, a claim by a worker against the subsidiary company employer would be relatively straightforward. All that would need to be established is that the worker had a work-related injury which had arisen from the employer’s failure to take appropriate safety precautions. Whilst fighting even this simpler type of a case on a level playing field would not be possible, it would nevertheless be feasible for local, under-funded, public interest lawyers to run such cases. However, as discussed above, multinationals frequently arrange their corporate structures so that the subsidiaries are asset-less and uninsured, so not worth suing. In countries such as South Africa, Namibia, New Zealand and Canada, workmen’s compensation legislation precludes claims against an ‘employer’.
It is for this reason (rather than to advance the principle that a parent company should be held legally accountable at home) that legal recourse to the parent company, based in the UK or the US and with substantial assets, has been sought. Establishing legal liability against a multinational parent company however, may be a novel, complicated and hugely expensive challenge. It requires a detailed investigation into and analysis of the relationship between the parent company and its subsidiaries with a view to determining the nature and extent of the parent company’s involvement in key aspects of the overseas operations and the parent company’s state of awareness of the conditions at the overseas operations. Thus the fact that legal action, wherever it is brought, would have to be taken against a parent company, makes funding of a case in a developing country, and hence access to justice there, a virtually impossible prospect. Consequently lack of legal resources and the corporate veil obstacle are both fundamental components of the inability to obtain access to justice in a developing country.
The corporate veil obstacle may also be present in a case brought against a parent company in the US or the UK. However, the availability, to overseas victims, of legal aid or lawyers willing to act on a contingency basis enables claimants to obtain access to justice. Here the obstacle to justice has been the exercise by the US and UK courts of the doctrine of forum non conveniens. In other European Union states (and also probably now in the UK too) Article 2 of the Brussels Convention precludes the application of forum non conveniens where a defendant is based in the EU.
Unless substantial funds are to be made available to ensure that victims are able to obtain proper access to justice in their local courts, access to multinational home courts in Europe and the US needs to be allowed in order to avoid a denial of justice. Apart from the possibility of allocating funds to public interest lawyers in developing countries for this purpose, legislation imposing legal liability directly on a multinational parent company would, for the reasons indicated above, enable cases to be run on a modest budget.
Lawyers will be more inclined to take the risk of acting on a contingency basis when there are good prospects of settlement without the considerable outlay involved in a full trial. Experience from the US suggests that the prospect of high damages awards and positive verdicts by juries creates a powerful incentive on a corporation to settle. Higher damages awards in developing countries would also increase this incentive and in turn would increase the willingness of lawyers to take on cases. Whilst juries may not be a realistic possibility, reducing the legal obstacles, by legislating to remove the corporate veil barrier, could achieve the same result.
Legislation to remove the corporate veil barrier, increase damages awards in developing countries, and allocate funding to enable cases to be fought in developing countries, would enhance the deterrent objective of legal action and would also encourage more uniform application of standards of health and safety and environmental protection across the globe. This would assist in the goal of ensuring greater multinational accountability and in making double standards a practice of the past.
copyright: Richard Meeran Partner, Leigh Day & Co; representing the claimants in the Cape, Thor and RioTinto cases.