Okpabi v. Shell on Appeal: Foreign Direct Liability in Troubled Waters

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It is a pleasure to welcome Lucas Roorda as a guest poster on “Rights as Usual”. M. Roorda is a Ph.D. candidate at Utrecht University, in the Institute of International, Social and Economic Public Law. He specializes in extraterritorial jurisdiction over corporate human rights violations. This post is his.

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These are busy days in English courts, insofar as foreign direct liability cases are concerned. Last year saw the London High Court decline jurisdiction in AAA v. Unilever on post-election violence in Kenya, while the Court of Appeals upheld the High Court’s interlocutory decision in Lungowe v. Vedanta on mining operations in Zambia. This February, on Valentine’s day no less, the Court of Appeals decided on the appeal against the interlocutory decision in Okpabi v. Shell. There seems to be little love lost between the applicants and the court: in a split decision (Sales LJ disagreeing) it upheld the High Court’s ruling that the applicants had no arguable claim against Shell, dismissing the appeal on all counts. This post examines the main tenets of the Okpabi appeals decision, how it compares against similar cases like Lungowe, and what that may mean for the future of foreign direct liability cases in English courts.

Okpabi and duties of care in the courts

To recap, the Okpabi case concerned a complaint filed by Nigerian plaintiffs from the Ogale community against Royal Dutch Shell (RDS) and its Nigerian subsidiary SPDC. The plaintiffs alleged that faulty maintenance of pipelines had caused oil pollution in their communities. The argued that RDS had breached a common law duty of care pursuant to Caparo v. Dickman. To argue a duty of care on the basis of Caparo exists, the plaintiffs needed to argue (1) that is was foreseeable that the subsidiary’s activities may result in harm, (2) that the parent was in close proximity to its subsidiary, and that (3) it was reasonable and appropriate to impose such a duty. The proximity criterion has been further clarified in Chandler v. Cape. As discussed by Ekaterina Aristova in her excellent blog, this approach also makes it possible to assert jurisdiction over subsidiary SPDC as a “necessary and proper party” to the claim against the parent. It has been argued in a number of recent cases, including Lungowe and AAA, and mutatis mutandis in the Dutch case of Akpan en Stichting Milieudefensie v. Shell, discussed here on this blog.

RDS and SPDC both denied that the leakages were the result of lacking maintenance and disputed the English courts’ jurisdiction over the case, arguing that the case should take place in Nigeria. In particular, they argued that the claim against RDS had no prospect of succeeding, and was merely used as an empty vessel to “anchor” the claim against SPDC and bring it within the jurisdiction of English courts. In 2016, the High Court accepted the defendants’ motion to dismiss, holding that the claimants did not have a “good arguable case” against RDS; consequently, there was no viable claim to which SPDC could be a “necessary and proper party”, and the entire case was dismissed. I have discussed that decision in detail here. The main thrust of the High Court’s decision was that RDS as the ultimate holding company was too far removed from its subsidiary in Shell’s corporate structure, and was not “in the same business” as its subsidiary as required by Chandler.

On appeal, Lord Justice Simon writing for the Court of Appeals agreed with the conclusions of the High Court, albeit with a different argumentation. The parties had agreed that the principal issue was the proximity element of the Caparo test: if there was no “good arguable case” against RDS on this basis, the case would fall apart entirely. In contrast to the High Court, the Court of Appeals’ decision focused more on RDS’ operational control over SPDC, and its involvement in the activities of its subsidiaries. While Simon LJ did recognize the plaintiffs’ argument that RDS has a central role in designing, implementing and monitoring environmental and security policies of the entire group, he did not consider those general policies to be sufficient to establish a degree of control that would satisfy the proximity requirement under Caparo (para. 127). The appeal was thus rejected.

The Okpabi decision stands in sharp contrast to Lord Justice Jackson’s assessment of very similar arguments made in Lungowe v. Vedanta recently. Lungowe also concerned duties of care of parent companies (the case is cited in Okpabi para. 23). The main difference between these cases is that the Lungowe court saw much more active involvement of the parent company with its subsidiary than the Okpabi court did with respect to RDS and SPDC. Moreover, the Lungowe court tried to avoid an all-too-deep inquiry into the merits, warning against “mini-trials” in this preliminary phase of the proceedings (see Lungowe 2017, para. 86 citing Coulson J, and para. 90). Instead, it recognized that while the case might not be open-and-shut at this stage, evidence may become available at a later stage to support the claimants’ assertions.

Mini-trials and perverse incentives

The Okpabi appeals decision is disappointing for several reasons. First, assessing “proximity” according to the standards set by the Court of Appeals essentially rewards corporate groups whose parent companies do not get actively involved with their subsidiaries’ operations. Even when the parent is instrumental in creating operational standards across the entire group, that would not be sufficient for it to incur a duty of care; whereas more hands-on involvement would. This creates perverse incentives for parent companies not to improve the environmental, security and health and safety standards of specific subsidiaries, lest they are held liable when harm occurs later. It also punishes companies that do try to be more responsible. It is a strange movement in times when transnational corporations are encouraged to take due diligence with regard to the human rights and environmental risks of their operations.

Second, it could be argued that the Court of Appeals’ approach to the proximity standard requires the plaintiffs to have a “winnable” rather than an “arguable” case. Earlier cases required that the plaintiffs’ claim against the parent was more than hypothetical. Simon LJ’s examination of the claimants’ arguments in contrast seems to suggest that a virtual ‘smoking gun’ was necessary to make the claim arguable. That “smoking gun” could be a document that showed that RDS had indeed actively intervened in SPDC rather than documents showing its capacity to do so. It is questionable whether this is appropriate at the jurisdiction stage of the case, or if this inches close to the “mini-trials” the Lungowe court warned of.

Third, this early incursion into the merits puts plaintiffs at a serious disadvantage with regard to producing evidence. They cannot rely on disclosure rules in this phase of the proceedings, which is arguably instrumental for producing the specific evidence required to argue the type of direct involvement required by the Court’s high standard for proximity. Instead they must build their case on public documents, supplemented with more general expert witness statements. Those can however be easily dismissed as irrelevant to the specific case, as indeed happened in Okpabi. On the other hand, defendants do have all access to those relevant documents, which they can use to their benefit. The Okpabi court’s approach may thus lead to serious equality of arms issues.

A better approach: from general to specific control

A better approach in my view would be the one advocated by Lord Justice Sales in his separate opinion. This would “merely” require that the claimants demonstrate that their case was “more than speculative” (para. 136). The documents discussed by Simon LJ, demonstrating the general control of RDS over the group and its operations would be sufficient to satisfy that test. While they might not be sufficient to eventually win the case on the merits, they provided a substantive context that rendered the claim more than speculative. The evidence could be strengthened by later evidence following disclosure on the argument that RDS also exercised specific control sufficient to satisfy the proximity requirement (see e.g. paras. 161 and 171). Unfortunately, Sales LJ was not joined by the third judge Lord Chancellor Vos.

Perhaps the most important point, however, was made by Sales LJ in his conclusions (para. 172-xi). RDS sought to control certain activities and their accompanying risks for its own interests, which are not inconsequential in terms of financial gain. Now that these activities have resulted in significant harm to others, it seems strange not to address the actor that was in a prime position to prevent those harms. In that context, it seems hardly appropriate to be overly concerned with how bad it would be for the parent company to be under a duty of care for all its subsidiaries’ operations (see para. 206). As the claimants have opted to take the case to the UK Supreme Court, it can only be hoped that some of the deficiencies in the Okpabi appeals decision are remedied later. If Okpabi is adopted as the right approach for assessing a ‘good arguable case’ for a duty of care, the prospects for foreign direct liability cases in the United Kingdom may be in serious jeopardy.