Dutch court rules on parent companies’ responsibility for overseas subsidiaries

On 29 January 2021, the Hague Court of Appeal (‘the Court’) issued a decision holding Shell’s Nigerian subsidiary liable for causing oil spills in the Niger Delta.

However, the decision also affected parent company Royal Dutch Shell (RDS or ‘the Dutch parent’), which was ordered by the Court to install a leak-detection system (LDS) in order to prevent spills in future.

In light of this decision, questions may rise as to when European courts will assume jurisdiction over events that took place abroad and when parent companies can be held liable for actions of their overseas subsidiaries. Below we provide some high-level insights.

Background

Four Nigerian farmers and the NGO Friends of the Earth (Milieudefensie) (on behalf of other community members) claimed that Shell was liable for damages they suffered as a result of oil spills from underground pipelines and an oil well in Nigeria between 2004 and 2007. They also demanded that Shell improve the clean-up operation and take measures to avoid spills in future.

Shell rejected liability. According to Shell, the spills were caused by sabotage and, in that case, there is no liability under Nigerian law that applied to the case. Moreover, Shell claimed the contamination was cleaned up sufficiently.

Dutch ‘anchor defendant’ gives Dutch courts jurisdiction

In 2015, in an interim decision, the Court assumed jurisdiction over the matter, as one of the defendants, RDS, is established in The Hague, the Netherlands. The claimants used the Dutch parent as a so-called ‘anchor defendant’, leading the Court to assume jurisdiction also with respect to the claims against the non-Dutch defendants (the Nigerian subsidiary, among others) due to the connection between the claims.

Shell’s arguments that the proceedings should have been conducted before the Nigerian courts because all the facts and evidence lie there, and that the claims against RDS seemed to be without any merit, were dismissed by the Court.

Further guidance on Dutch anchor defendants can be found in a 2018 collective action case against the Petrobras group, which also included two Dutch defendants (one of them being a finance company), concerning an alleged bribery scheme. In that case, the Dutch court found that it lacked international jurisdiction in respect of the non-Dutch defendants because the claimants had failed to demonstrate that either:

• the claims against non-Dutch defendants were sufficiently connected with the claims against Dutch defendants; or
• harmful acts had occurred in the Netherlands.

The Shell and Petrobras cases are part of a wider trend where (collective) actions are brought against non-Dutch and one or more Dutch defendants before Dutch courts in matters that almost exclusively relate to a foreign jurisdiction.

When multiple parties are involved, there is a risk that a Dutch court will allow the claims to be brought under the same forum in order to improve efficiency and avoid conflicting decisions. However, in such cases, the Dutch courts are expected to critically assess whether they have jurisdiction.

A decisive factor in the Shell case, which led the Dutch court to accept jurisdiction, was probably that the Dutch anchor defendant was the parent company with control over its Nigerian subsidiary, and not merely a holding company without any real ties to the case. This enabled the claimants to formulate a claim against the Dutch anchor defendant that had some merit.

The recent Dutch Act on redress of mass damages in a collective action (WAMCA), which allows a claim vehicle to claim monetary damages on behalf of injured parties, does however include a limited-scope rule preventing the Netherlands becoming too popular a forum for collective actions without sufficient nexus with the Netherlands.

This limited-scope rule provides that a (collective) claim is sufficiently related to the Netherlands if:

• the majority of the class resides in the Netherlands;
• the seat of the defendant is in the Netherlands and there are additional circumstances pointing to a sufficient connection with the Netherlands; or
• the events causing the damages took place in the Netherlands. 

Dutch parent found to be liable

The Court applied Nigerian law in resolving the merits of the dispute.

The sources of Nigerian civil law include both English and Nigerian law. English case law dating from after Nigeria's independence in 1960, while not formally binding, is considered to have persuasive authority and is often followed in Nigerian jurisprudence.

The Dutch parent was therefore found to be liable on the grounds of common law, in particular the Dutch Parent was found to owe a duty of care directly to the claimants at common law

In establishing the parent company’s duty of care, the Court’s reasoning was influenced by the 2019 UK Supreme Court’s ruling in Vedanta. In particular, the Court noted that: “If the parent knows or should know that its subsidiary is unlawfully causing damage to third parties in an area in which the parent interferes with the subsidiary, then, as a starting point, the parent has a duty of care towards those third parties to intervene”.

This played out as follows. First, the Court established that Shell’s Nigerian subsidiary had the duty to provide a ‘timely and adequate response’ to the spills by installing an LDS in order to prevent future oil spills. As the UK Supreme Court held in Vedanta, whether RDS as the parent company owed a duty of care depended ‘on the extent to which, and the way in which, the parent availed itself of the opportunity to take over, intervene in, control, supervise or advise the management of the relevant operations… of the subsidiary’ (our emphasis). 

In deciding whether the parent company had in fact sufficiently intervened in the decision to equip the Nigerian pipelines with an LDS, the Court considered several aspects, such as:

• Shell’s substantial financial interest in Nigeria;
• its awareness of previous spills in the area;
• the bonus of members of Shell’s executive committee being partly dependent on the number of oil spills;  
• specific documents and witnesses discussing the possibility of installing an LDS; and
• the structure/governance of the Shell group.

The above considerations led the Court to decide that, at least from 2010 onwards, RDS became concretely (and quite intensely) involved in the LDS matter. Therefore, the duty of care also extended to the Dutch parent.

By ignoring this duty and not compelling its subsidiary to install the system, RDS acted in tort and was ordered to install an LDS within a year of the judgment.

Shell Nigeria’s sabotage defence

The Court held that, according to Nigerian law, a heavy burden of proof lies on the party claiming sabotage of pipelines. This means that sabotage must be proved beyond any reasonable doubt.

Although sabotage is the most likely cause of the spills (rather than Shell Nigeria’s negligence), Shell did not meet the high evidence threshold and therefore Shell Nigeria was held strictly liable for the damage caused by the leakages.

The liability for damages was not extended to RDS as the strict liability only applies to the party holding the local exploration licence (Shell Nigeria) and it could not be established in this context that Shell Nigeria (and therefore RDS) had breached its duty of care.

What now?

The amount of compensation will be determined in a future damage-assessment procedure.

The Court’s decision could be appealed to the Dutch Supreme Court.

On 12 February 2021, the UK Supreme Court ruled that RDS can also be sued before the High Court in London in a lawsuit brought by thousands of other Nigerian villagers in relation to separate oil spills. For an in-depth analysis of the UK judgement, consult: Parent Company Liability - the UK Supreme Court clarifies approach to jurisdictional challenges, Chris Bellringer, James Raeside, Lucy Jones (freshfields.com)