5 things English companies and their investors need to know about human rights-related litigation risks

Corporate impact on people is an increasingly regulated area. In recent years, policymakers have turned soft law frameworks and standards in this field into hard law obligations. The most prominent example is the EU Corporate Sustainability Due Diligence Directive (CSDDD), which requires in-scope companies to carry out risk-based human rights due diligence on their operations and supply chains, take steps to address identified risks and provide remedy to those adversely affected. Similar laws exist at national level, including the French Loi de Vigilance, the German LkSG and the Norwegian Transparency Act.

In the UK, while large companies have some human-rights related reporting obligations under the UK Modern Slavery Act 2015, corporate human rights due diligence is not mandatory – at least not yet. However, the litigation risks associated with not doing good, risk-based human due diligence for companies headquartered in England are increasingly significant and should be on the radar of Boards, management teams and investors. Here are five things you need to know.

A parent company incorporated in England may owe a duty of care in negligence to people harmed by the actions of its overseas subsidiary.

In Vedanta Resources PLC and another v Lungowe and others, a case arising out of pollution at a Zambian copper mine, the Supreme Court held that it was at least arguable that the English parent owed a duty of care to those harmed by the actions of its Zambian operating subsidiary. The court said expressly that nothing much turned on the parent/subsidiary relationship itself. It was simply applying the ordinary rules of negligence that determine when Party A owes a duty of care to someone harmed by Party B. Everything depended on the extent to which Party A had, in practice, intervened in, controlled, supervised or advised as to the management of the subsidiary and, in so doing, ‘assumed responsibility’ to those harmed.

The court gave four illustrative examples of assumption of responsibility: (i) where a parent has in substance taken over management of the relevant activity; (ii) where it has put in place groupwide policies that are defective; (iii) where it takes steps to implement groupwide policies that are defective; and (iv) where it holds itself out as exercising a degree of control over subsidiaries, even if it never actually exercises that control. In Okpabi and others v Royal Dutch Shell Plc, a case arising out of catastrophic oil pollution in the Niger Delta, the Supreme Court endorsed this approach and added further illustrative examples of assumption of responsibility, including where a subsidiary is managed by representatives of the parent company. Given modern group operating procedures, it is very easy to envisage situations in which group-level executives have management oversight of a business activity or division that spans multiple jurisdictions and local operating subs.

The same principles apply to harms caused by suppliers and contractors

Because the test is assumption of responsibility and nothing turns on the parent/subsidiary relationship, there is no reason the same principles cannot apply where harms are caused by a third party such as a contractor or supplier. We saw exactly this development in a recent English High Court claim against Dyson, brought by migrant workers alleging forced labour and exploitative conditions at factories manufacturing components for Dyson – factories not owned by Dyson itself. The claimants alleged that Dyson owed them a duty of care because it exerted a high degree of control over manufacturing operations and working conditions, was responsible for communicating and implementing mandatory policies and standards concerning workers' conditions and implemented those standards through training, supervision (including regular audits) and enforcement.

Dyson challenged the jurisdiction of the English court and ultimately lost that challenge in the Court of Appeal. The Supreme Court refused permission to appeal on the question of jurisdiction and the case subsequently settled, without admission of liability by Dyson.

Similar principles may apply where the claim against the parent is not an English law claim

In the Município de Mariana v BHP more than 600,000 claimants brought proceedings in the English court seeking up to £36 million in damages arising out of the collapse of the Fundão Dam. The dam was owned and operated by a Brazilian JV in which BHP Brazil was a 50% partner. The claims in the English Court were issued against the parent company of BHP Brazil - BHP Group UK Ltd.

The claims in this case were governed by Brazilian law - the two principal claims being a strict liability pollution claim under Brazilian Environmental Law and the other a negligence-style claim under the Brazilian Civil Code. The liability trial concluded in November last year with judgment given for the Claimants on both claims - issues of quantum will be determined at a later stage. Notably the Claimants were backed by a US$552.5 million litigation funding facility.

While these were not English law claims (and so do not advance the Vedanta and Okpabi line of cases) much of the reasoning, particularly in deciding the strict liability claim, was very familiar. The judge concluded that, although BHP was not the legal owner of the dam, it was directly or indirectly responsible for the polluting activity by reason of the degree of control it exercised over the operation of the JV. The court considered, among other things, BHP's role in determining the make-up of the JV board, its involvement in strategy development, its oversight of operations and risk management, its financial and technical audits and its financing of major JV projects.

In short, the court, just as it did in Vedanta and Okpabi, focussed on the evidence of how the relationship between parent/sub worked in practice and we see that the same sorts of factor were relevant and persuasive, irrespective of the governing law.

The English courts are an increasingly attractive forum for these types of claims

Companies incorporated in England with overseas operations and/or supply chains and their investors should expect significantly more litigation of this nature. The English courts are an attractive forum for claimants pursuing these types of claims – its disclosure rules afford access to extensive documentation showing how a defendant company operates and manages risk, the successful party stands to recover their costs and Conditional Fee Agreements are available in principle. As the cases demonstrate, the English courts are often willing to assume jurisdiction even where claims are huge and complex in scope, arise out of events that took place entirely abroad and are governed by foreign law. The involvement of litigation funders in the Fundão Dam case is also a sign of things to come.

There are practical steps that English companies can take to mitigate human rights litigation risk

English-headquartered multinationals – particularly those whose operations, activities and supply chains extend into jurisdictions and sectors where risks to people are high – should take three immediate steps.

First, acknowledge this growing litigation risk. Ensure the Board and management team understand it and that it is appropriately captured and monitored in your mainstream corporate risk register.

Second, get some help to assess and understand the risks as they affect you - identifying which parts of your overseas operations or supply chain are most likely to give rise to litigation risk and why.

Third, invest in good, risk-based human rights due diligence that is appropriate to your business context – bringing your policies and processes for identifying and mitigating human rights harms up to a robust and effective standard. Companies that do so will not only be better placed to defend themselves when (not if) these claims come but better placed to spot and address risks before they materialise or escalate. Any companies that operate or sell products into Europe will need robust and effective policies and procedures in any event to manage risks under the new EU Forced Labour Regulation when this comes into effect next year – see our other Hot Topic in this briefing.

For further guidance and tailored advice on corporate human rights litigation risk or anything else discussed in this briefing, please get in touch with Kerry Stares or with your usual Charles Russell Speechlys contact.