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What can a parent company do to avoid liability for the actions of its foreign subsidiaries?

The  recent case of Vedanta Resources PLC and another (Appellants) v Lungowe and others (Respondents) [2019] UKSC 20 involved an action by a group of Zambian citizens against both a parent company and its foreign subsidiary; it was decided for the first time that a parent company can owe a duty of care to the employees of its foreign subsidiary. The case provides a useful checklist on what parent companies should and should not do to try and avoid liability. This case together with a similar one due to be decided later this year will also have a bearing on trading relationships and supply chains in a post Brexit world.  We will report further on this later in the year.

Factors that should be considered for a parent company seeking to avoid liability for the actions of its foreign subsidiaries:
Control

The case confirmed that the overriding principle the courts will look into is the actual control over the supply chain and it is generally accepted that looking at ownership or shareholding will not be the deciding factor.

The courts will take into account things like, the contracts between the companies, management structure and the actual operation of the chain of companies. If the companies operate as one economic unit, i.e. giving the parent company operational control, it is likely that this will trigger a duty of care.

To try and avoid liability a parent company needs to be careful in relation to the decision making and control of the subsidiary, perhaps by ensuring that decisions are made independently by the board of the subsidiary company.

Are there group-wide policies in place?

The Court said that it is not sufficient to lay down a group-wide policy and expect each subsidiary to deal with and manage this individually.

The Court specifically observed that ‘Even where group-wide policies do not of themselves give rise to such a duty of care to third parties, they may do so if the parent does not merely proclaim them, but takes active steps, by training, supervision and enforcement, to see that they are implemented by relevant subsidiaries’   – therefore triggering a duty of care throughout the supply chain.

Therefore, a parent company should be careful, if applying group wide policies, not to be involved in the administration or enforcement of such policies.

Has the parent company made any public statements?

A duty of care will be triggered if a parent company has made any public statements in relation to them supervising and controlling the subsidiary, even if this does not happen in reality. In the case the parent company made public statements emphasising commitments to the environmental risks and other shortcomings of its subsidiary. The Court said ‘In such circumstances its very omission may constitute the abdication of a responsibility which it has publicly undertaken.’

Therefore, a parent company should be careful, if making public statements, that these do not assert a responsibility over their subsidiaries.

What knowledge of the subsidiary does the parent company have?

The parent company’s knowledge of the subsidiary can be relevant to a duty of care in the following ways:

  1. actual knowledge of risks facing the subsidiary company may be sufficient to show a duty of care – any such knowledge will take into account the foreseeability of any damage;
  2. any ignorance of the subsidiary will not preclude a duty of care if there is a clear obligation on a parent to consider the risks and take action; and
  3. any expertise or superior skills of the parent company should be passed to the subsidiary and a parent company will be deemed to have a duty to monitor and assist a subsidiary with inferior expertise.
Summary

The case highlights a number of key issues relating to supply chain liability relevant for  international corporate groups and this judgment will additionally have practical importance to all UK domiciled companies with overseas subsidiaries, especially so in the light of Brexit.

For further information please contact the writer and our expert, Simon Beasley in our Dispute Resolution team on 0207 288 4769 or email simonbeasley@boltburdon.co.uk.

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Simon Beasley

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