Parent company owes duty of care in transnational cases – Hague Court of Appeal
1 March 2021
The Hague Court of Appeal has recently handed down a ruling that is of profound importance to environmental lawyers. It is not only the first case at the appellate level in Europe that has resulted in a victory on the merits for the victims, but also the first case to hold that a parent company was under a duty of care with regard to foreign claimants. I will attempt to summarise one of the judgments in the following paragraphs, but readers would do well to look at the detailed analysis of the case by Dr Lucas Roorda on the Rights as Usual blog: “Wading through the (polluted) mud: the Hague Court of Appeals rules on Shell in Nigeria”.
David Hart QC will follow up my post with a piece on the UK Supreme Court decision in Okpabi v Shell on 12 February 2021.
There are in fact three judgments in this case Four Nigerian Farmers and Milieudefensie v. Shell; as Dr Roorda says,
The first (‘Cases A and B’) concerns an oil spill from an underground pipeline near Oruma in 2005; the second (‘Cases C and D’) concerns an oil spill from an underground pipeline near Goi in 2004; the third (‘Cases E and F’) concerns an oil spill from a wellhead near Ikot Ada Udo.
All three cases involve the same legal issues, different claimants and slightly different facts. Dr Roorda focusses on Cases C and D in her post. To avoid unnecessary overlap, I will be referring to Cases E and F, Milieudefensie v Royal Dutch Shell plc (1) and Shell Petroleum Development Company of Nigeria Ltd (E), and Shell Petroleum Company of Nigeria Ltd v Friday Alfred Akpan (F) . Milieudefensie is the Netherlands branch of the NGO Friends of the Earth, who supported all of the cases.
The claims all concerned oil spills which caused severe damage to local farmlands and fishing grounds. The claimants affected were Nigerian fish farmers, who held both Shell Nigeria (SPDC) and its parent company Royal Dutch Shell (RDS) liable for negligent maintenance of the pipelines and wellhead, inadequate response to the spills and insufficient clean-up, thereby causing that damage. As Dr Roorda says, they did not have much success before the The District Court of the Hague in 2013 , which initially only upheld one claim from Cases E and F, that of Friday Alfred Akpan (discussed here). But it dismissed all other claims, accepting Shell’s defence that the respective spills were likely caused by sabotage, and rejecting liability of parent company RDS. That court also concluded that
parent companies like RDS in general have no obligation under Nigerian law to prevent their (sub-)subsidiaries such as SPDC from inflicting damage on others through their business operations’ (para. 4.26).
But in January 2021 the Hague Court of Appeal reversed these findings. It held the local company SPDC liable for damage caused by oil spills in Cases A to D and ordered payment of damages to the claimants, the amount to be determined in a separate hearing (schadestaatprocedure). It also ordered both SPDC and RDS to install a leak detection system (LDS) in the pipeline central to Cases A and B. In Cases E and F, the court issued an interlocutory decision ruling that these spills were caused by sabotage, but requested additional information from the parties on the extent of the damage and subsequent clean-up actions.
The claimants had primarily argued their case on the basis of the federal Oil Pipelines Act (OPA), which outlines obligations for operators of oil infrastructure; and on common law torts, specifically the torts of negligence, nuisance and trespass to chattel. To determine the liability of SPDC for both spills, the court looked primarily at the OPA, as SPDC was the operator of the pipelines for the purposes of OPA.
Background facts and law
The dispute in cases E and F arose from two spills from an oil well near the village of Ikot Ada Udo in Akwa Ibom State, Nigeria. This oil well, known as Ibibio-1, was drilled there in 1959 by SPDC’s predecessor in title, but was never used for oil production; it remained an exploration well, the wellhead of which was sealed above ground with a so-called “Christmas tree”. This is a solid steel construction with a number of hollow pipes and steel valves fitted with handwheels.
Two major leakages occurred in 2006 and 2007. Milieudefensie blamed the damage the leakages caused to nearby agricultural lands and fish ponds on the SPDC as operator of the oil well, but also on RDS as the head of the Shell group.
The parties agreed that this claim had to be judged under Nigerian law, also insofar as it was instituted against the parent company RDS. The question of which sanctions should be imposed was also one to be determined under Nigerian law, which closely resembles the common law of England and the doctrines of equity. English precedents are not formally binding on Nigerian courts but have persuasive effect. The key tort of nuisance is of course from the 19th century case of Rylands and Fletcher (House of Lords 17 July 1868 (LR 3 HL 330).
In the Hague Court’s court’s description of that case, that rule reads as follows:
The person who for his own purposes brings on his land and collects and keeps there anything likely to do mischief if it escapes, must keep it at this peril, and, if he does not do so, is prima facie answerable for all the damage which is the natural consequence of its escape.
…The Rylands v Fletcher rule places strict liability – not unlimited, incidentally – on the occupier of a land for the damage which occurs when the conditions of this rule are met. The strict liability of section 11(5)(c) OPA can be seen as the elaboration of this rule for the case of pipeline damage.
Akpan made his living by farming land and operating fish ponds in the Akwa Ibom state in Nigera. North of the village is the well, in the middle of which SPDC has exclusive rights of way to guarantee that they can access its pipes and installations for maintenance and repair. The wellhead belongs to a joint venture of which SPDC is the operator. The crude oil extracted by the drilling well is transported by pipeline to flow station where it is separated from the water and natural gas that are also produced by the well.
The “christmas tree” (see picture) by which the wellhead in question was sealed above ground consists of a series of compartments which are opened or closed by valves. There was an incident in September 2006 where the SPDC representatives were alerted of a spill and “a group of youths used violence against the SPDC team” [para 2.4]. The second oil spill, in August 2007, was reported to the SPDC.
Arguments before the Court
In the previous hearing the District Court accepted that the two oil spills were caused by sabotage. This evidence was examined anew by the Court of Appeal. Shell, supporting the allegations of sabotage, recalled the access problem that also existed in 2006, i.e. the obstruction of work and the acts of violence at the time, as well as the difficulty of finally getting to the wellhead to address the problems in 2007. Before the Court of Appeal Milieudefensie did acknowledge sabotage, but submitted that the taps had not been closed properly or that they had started leaking over time.
The District Court had found that SPDC – even if it was sabotage – committed a tort of negligence towards Akpan by failing to adequately secure the Ibibio-1 prior to the leakages in 2006 and 2007 against the sabotage that could then be easily committed. SPDC was therefore ordered to pay compensation for the damage caused by the spills, more precisely the damage resulting from the contamination of Akpan’s land and fish ponds.
There is a great deal more on the evidence supplied to the Hague Court of Appeal which I will not go in to here. The salient issues in all three cases were as follows.
First, the court examined liability for causing the oil spills. It considered that art. 11(5)(c) OPA imposes a strict liability standard for operators of oil pipelines. The operator can be exempt from liability in cases of sabotage, which Shell argued was the most likely cause of the spills in Oruma and Goi. The court however held that under Nigerian law sabotage should be proven beyond reasonable doubt, as was argued by the claimants. While the court noted that the available expert reports indeed suggested that sabotage was a likely cause of the spills, it decided that this alone did not meet the standard of ‘beyond reasonable doubt’. It thus concluded that SPDC could not evade the strict liability standard of art. 11(5)(c) OPA, and that it is liable for damages arising out of the spills.
Second, regarding Shell’s response to the oil spills, the court noted that art. 11(5)(c) of the OPA was not applicable and that the claims regarding the response should be assessed in light of common law torts, specifically negligence. In both cases (A and B; and C and D), the court had found that SPDC owed a duty of care to the claimants, and acted negligently in its response to the spills. In the case of the A and B spill, SPDC was aware of the risk of spills and potential problems with on-site inspection following a suspected spill, yet neglected to install a ‘Leak Detection System’ or take other sufficient measures. This would have allowed a more immediate response to leaks and spills, even if access to the site was (temporarily) impossible. In the case of the C and D spill, the court noted that while SPDC did perform an on-site inspection by helicopter to assess the leak, this could have been done at least a day earlier. The court additionally ordered that SPDC should install an LDS system in the pipelines in both cases.
Lastly, the court discussed the clean-up undertaken by Shell after the spills. Here, the court found that while there was still some pollution in both regions, the duty of care Shell had to ensure adequate clean-up did not extend beyond the actions it had already undertaken, as assessed by applicable industry standards. The court also dismissed the claimants’ arguments that the remaining pollution constituted a violation of the farmers’ right to a clean environment, leaving aside whether such a right could be horizontally invoked under Nigerian law.
Liability of RDS
The court examined whether Royal Dutch Shell, parent company of the Shell group, was also liable for the oil spills. Such liability could be based on English precedent, which the court noted has persuasive authority in Nigeria’s common law system. The question was then whether the parent company also owed a duty of care to the claimants. A duty of care can be incurred if the company is in sufficient proximity to the claimants, for example by intervening in its subsidiary’s operations, and if imposing that duty is ‘fair, just and reasonable’. The Court observed that the UK Supreme Court had confirmed in Vedanta v. Lungowe that parent companies can owe a duty of care to persons affected by harmful activities of foreign subsidiaries.
The claimants had argued that RDS, through its position in the Shell group and interventions with its Nigerian subsidiary, had incurred a duty of care, but the court dismissed this argument with regard to causing the spills. It noted that for a parent to incur a duty of care, the subsidiary must have acted wrongfully. But in all three cases the fact that the subsidiary had not acted wrongfully made no difference; the SPDC incurred strict liability as an operator under the OPA. With regard to the response to the spill, the court found a limited duty of care- albeit limited.
Within the somewhat dry wording of the Court of Appeal can be found what Dr Roorde calls
a monumental victory for the victims and their communities, and by extension for Milieudefensie.
This was the first time that a foreign anchor defendant has been found liable, leading to an enforceable decision on the merits. The parent company RDS was found to owe a common law duty of care to residents of a third state, something of a “big leap … towards more corporate accountability.”
Moreover, this case is the first case where a parent company has been found to owe a common law duty of care to claimants residing in a third state, specifically local communities affected by its subsidiary’s operations. The finding that there was sufficient proximity between the parent company and its employees or local communities to incur such a duty is a vital first step in establishing real and enforceable transnational duties of care. As Dr Roorde notes,
English courts had contemplated this possibility in Connelly v. RTZ and Lubbe v. Cape, and the UK Supreme Court confirmed this in Vedanta v. Lungowe. …. This holding thus staves off the fears that transnational corporate duties of care are a mere hypothetical, theoretically possible but never actually occurring in the real world. In my view, this is potentially the most lasting aspect of the case.
This does not mean of course that this forms a precedent for all environmental disasters where the parent company is based in another country. The Hague Court of Appeal kept its findings to the particular rules under the OPA and the facts of the case.
It does mean that in a different case, say in a different country with different local laws, concerning a different industry with different operational policies, or concerning even slightly different facts, the outcome may be completely different to this case.
It was significant that the applicable law in Nigeria is the common law, which means that it is possible to apply English precedent, most importantly in this case the rule in Rylands v Fletcher.
Dr Roorde points out that the way the Dutch court applied that precedent was arguably problematic, specifically where it sided with Shell in holding that the subsidiary must itself have committed a tort before the parent can incur a duty of care.
This does not follow directly from the English cases cited by the court, nor does the court clarify why finding that SPDC was subject to strict liability with regard to oil spills precludes a duty of care for RDS. Where it does find a duty of care, that finding stems from RDS’ specific interventions in SPDC’s operations after 2010, rather than from its central position of authority in the corporate group. I have argued on this blog before that finding a duty of care based on actual interventions of the parent, rather than its capacity to intervene, could create an incentive for parent companies not to interfere with their foreign subsidiaries (or only very generally), as this could potentially lead to liability later.
… not just by the the victims in this procedure who waited 13 years for a proper remedy, but also in the wider communities of the Niger Delta. As I pointed out in this blog, several significant legal and practical questions remain, from the availability of information necessary to viably argue a case to the precise extent of parental duties of care. But this outcome may well bolster other victims to bring their cases before home state courts, and push the trend towards more corporate accountability further forward.