Implications of company policies and governance on subsidiary responsibility

Gavin Deeprose is a Senior Professional Support Lawyer, DLA Piper Scotland LLP

In April, in a landmark ruling, the UK Supreme Court decided that Vedanta Resources Plc could be held legally accountable for pollution allegedly caused by its Zambian subsidiary’s mining operations.

The case is part of a growing trend in parent company litigation which has important implications for multinational companies who make policy commitments across their group.

In the Vedanta case, nearly 2,000 Zambian villagers sued a mine operator, and its UK parent company (Vedanta), for damage allegedly caused by the discharge of toxic material into local waterways. Legal proceedings on behalf of the villagers commenced in London.

Alistair Drummond is a Partner with DLA Piper Scotland LLP

The case against Vedanta was that it was negligent and responsible for the harm caused by its subsidiary because it exercised “a very high level of control and direction” over their activities. In particular, the villagers pointed to published materials in which Vedanta assumed responsibility for proper environmental standards and their implementation through training and monitoring across the corporate group.

Vedanta claimed that accepting the villagers’ arguments would expand the scope of a parent company’s duty of care inappropriately. The established legal position in the UK, they said, was that parent and subsidiary companies were separate legal entities and responsible for their own operations and liabilities.

The UK Supreme Court disagreed. In a unanimous ruling the judges held that the action could proceed to trial as there was a sufficiently arguable case that Vedanta through its policies, training and monitoring exercised enough control over its subsidiary to be responsible for the alleged harm.

Whilst only a procedural decision the villagers’ claim and the court’s judgment have important implications for multinational companies.

They demonstrate that lawyers acting for pursuers are now scrutinising group-wide policies to establish grounds for action against UK parent companies where damage is caused by their subsidiaries abroad.

Although it remains to be seen whether a duty of care will ultimately be established in such a case, the court’s comments in Vedanta suggest that the existence of a relevant group-policy may be sufficient to push a claim towards a trial.

They highlight the need for multinationals with global operations to review the potential legal implications of their company policies and governance. Consideration should be given to which group-policies are currently in place and how they are communicated, monitored and enforced and whether specific issues are better dealt with at a local or central level and how that is reflected in the company’s governance systems. Environmental, data privacy and human rights policies should be reviewed as a matter of priority.

As the ruling in Vedanta is one of English law it is not binding in Scotland, but it is likely to be treated as a persuasive authority in Scottish courts. With a new Scottish class action procedure on the horizon, Scottish companies with subsidiaries overseas should act now to manage the risks presented by the decision. Following Vedanta sheltering behind a parent-subsidiary legal relationship to escape liability may no longer be an option.

Alistair Drummond is a Partner with DLA Piper Scotland LLP and Gavin Deeprose is a Senior Professional Support Lawyer, DLA Piper Scotland LLP

Implications of company policies and governance on subsidiary responsibility – Alistair Drummond and Gavin Deeprose