ESG litigation risk for UK-headquartered companies in respect of human rights, environmental impact and labour conditions overseas: An update on case law

The question of human rights and civil liability for businesses has been brought into the spotlight again following a recent Court of Appeal decision concerned with forced labour. This is the latest in a line of decisions that (while all made at an early stage in proceedings to determine jurisdiction rather than at a final trial of the issues), point towards a material increase in litigation risk for UK-headquartered companies in connection with adverse environmental or human rights impacts overseas, whether those impacts occur in their own or a subsidiary’s operations or are caused by an upstream supplier.

Parent companies and liability for subsidiaries’ activities – a recap

In HRH Emere Okpabi v Royal Dutch Shell [2021] UKSC 3 around 50,000 inhabitants of rural communities within the Niger Delta alleged that a parent company negligently failed to prevent its subsidiary from causing environmental damage by an oil spill.

The Supreme Court held it was arguable that, by exercising a sufficiently high level of supervision and control over the relevant subsidiaries’ activities, the parent company had ‘assumed responsibility’ sufficient to establish a duty of care to the claimants. This was in order for the court to determine that there was a real issue to be tried so as to support the claimants’ entitlement to serve their claim outside the jurisdiction on the foreign subsidiaries, with the parent company as the ‘anchor defendant’ in England. The court emphasised that a mini trial should not be conducted at this stage and that the court should accept the factual assertions made by the claimants, unless they are ‘demonstrably untrue or unsupportable.’ This indicates the relatively low bar for claimants to pursue claims against companies in this jurisdiction arising from the acts of overseas subsidiaries.

This case closely followed Vedanta Resources Plc v Lungowe [2019] UKSC 20 – another important decision concerning parent-subsidiary company liability. Here, a UK-domiciled parent company’s Zambian subsidiary had been allegedly polluting local waterways causing personal injury and economic loss. The Supreme Court highlighted that parent companies can be liable for the actions of their subsidiaries if they exercise significant control or oversight over them. This may include situations where the parent company ‘holds itself out’ in published materials as exercising a degree of control over its subsidiaries, even if the parent company never actually exercises that control. The parent company effectively ‘assumes responsibility’ for the actions of their subsidiaries.

Liability arising from an agreement with a third-party

In Hamida Begum v Maran (UK) Limited [2021] EWCA Civ 326 the claimant was able to establish at least an arguable case (for the purposes of resisting summary judgment / strike out) that the defendant, a UK-based company, owed a duty of care to a man who was fatally injured by a company in the Defendant’s supply chain.

The case concerned a shipping agent (Maran) which sold a defunct oil-tanker to a third party for disposal. This third party was required to dispose the ship in a breaking yard which, under the contract, had to be in ‘safe conditions.’ Unfortunately, a shipworker fell to his death due to a lack of safety harness.

Despite Maran’s lack of knowledge regarding the identity of that shipworker and the site location, and Maran’s insistence that there was a contractual assurance from the third party to dispose of the ship safely, the court’s decision to allow the claim to proceed was based on recognising potential liability beyond traditional parent-subsidiary relationships. Specifically, the defendant knew based on the sale price that the boat would likely be sent to Bangladesh, where dangerous working practices were very common. Maran was ultimately responsible for creating a state of danger, resulting in a third-party causing injury to the claimant.

The court flagged several significant hurdles the claimant would have to overcome to establish a duty of care but held that the case was sufficiently arguable to resist summary judgment / strike out. As such this is a decision of the court at an interim stage which makes no final determination. It is also likely to be a rare case due to its extreme facts. Nonetheless, it highlights the potential for civil liability remains for companies that do not carefully evaluate human rights risks in their value chains, especially for those in higher risk sectors.

Supply chain liability – recent developments

On 27 May 2022, proceedings were issued in the English High Court against Dyson, alleging that 24 migrant workers from Nepal and Bangladesh had been trafficked to Malaysia and subjected to forced labour, exploitative and abusive conditions whilst employed at two Malaysian factories that supplied Dyson with parts. Notably, these factories were not owned by Dyson itself.

In the most recent development of the case, in Limbu v Dyson Technology Ltd [2024] EWCA Civ 1564, the Court of Appeal ruled that the UK, not Malaysia, was the most appropriate jurisdiction for the lawsuit. The court identified several factors supporting jurisdiction in England, including:

• The domicile of Dyson UK as the ‘principal protagonist’.
• That the High Court judge had focused on the location of the alleged harm in Malaysia without sufficient regard to links to England, such as mandatory group-wide supply chain policies produced and monitored by employees and officers in England.
• On funding, the court recognised that the claimants would be unable to bring a claim in Malaysia. The claimants were very poor with no means to pay for sufficient legal representation, and it was not reasonable to expect Malaysian lawyers or NGOs to fill that gap (with doubt over the legality of conditional fee arrangements in Malaysia).
• On equality of arms, that is, the balance of legal representation, Dyson would likely be able to finance high-quality experienced legal representation in either England or Malaysia. Due to the claimants’ funding issues, there would be significant inequality of arms if the claim took place in Malaysia. The court emphasised the need to ensure equality of arms in such serious circumstances.

While, once again, this was an interim decision on jurisdiction only, Limbu is  another example of a claim brought against a UK-headquartered company in respect of human rights, environmental impact and labour conditions overseas. It is also novel in taking the principles set out in Vedanta and Okpabi and applying them to third-party suppliers.

Key take-aways

From a purely regulatory perspective, it is currently unclear what standards of human rights and environmental due diligence companies – particularly those doing business in the EU – will be required to carry out on their operations and supply chain. The Corporate Sustainability Due Diligence Directive (CSDDD), which entered into force in July 2024, prescribed standards for due diligence based on, albeit not wholly aligned with, the UN Guiding Principles on Business and Human Rights (UNGPs) which have set the bar for best practice since their publication in 2011. In recent days, however, the personal scope (who is caught), material scope (what is required) and timing of the CSDDD has been thrown up in the air by the Omnibus proposals published by the European Commission – proposals which are widely seen as going much further than their stated aim of ‘simplifying’ the CSDDD and instead setting a much lower regulatory bar for action (see our briefing here).

Notwithstanding this regulatory uncertainty, there are clearly other compelling commercial reasons for companies to advance their efforts in this area – not least the increasing litigation risk to companies headquartered in the UK with significant oversees operations and/or supply chain. The best strategy for managing this litigation risk remains appropriate, risk-based due diligence, modelled on the UNGPs.

For more information on anything contained in this briefing or for assistance developing an appropriate, risk-based due diligence approach for your organisation, please get in touch with Kerry Stares or with your usual Charles Russell Speechlys contact.