English law developments on parent liability for local impacts - the Vedanta Resources decision

International Business Obligations

In brief 4 min read

On 10 April 2019, the English Supreme Court ruled that nearly 2000 members of rural farming communities in Zambia can bring proceedings in the English courts against the UK-incorporated Vedanta Resources Plc (Vedanta). The claims relate to the copper mining operations of one of Vedanta's subsidiaries, Konkola Copper Mines Plc (KCM). The Supreme Court's decision has the potential to open the way for claims to be brought against parent companies by third parties affected by the operations of a subsidiary (eg local residents). The decision also highlights a tension between emerging litigation risk and public commitments made by companies regarding their responsibilities to communities and the environment. Partner Rachel Nicolson, Senior Overseas Practitioner Emily Turnbull and Lawyer Jessye Freeman report.

What does this mean for Australian companies?

  • Plaintiff-side actors (including law firms and litigation funders) in the increasingly entrepreneurial Australian class action landscape will no doubt read the Vedanta decision with great interest, especially as we enter the post-Royal Commission era of corporate accountability.
  • Multinational companies in particular should be aware that the law may be developing in such a way that the local impacts of overseas business operations have the potential to be felt much closer to home.
  • However, the decision is unlikely to result in a rush of environmental claims against Australian parent companies. For one, the substantive merits of the case have not been determined. The decision was an interlocutory one and Vedanta may yet be found to have owed no duty of care to the Zambian claimants. Further, the decision was based on European Union law (and its interplay with domestic English law), which – tritely – does not apply in Australia.

Broader access to the courts by impacted stakeholders

In July 2015, the Zambian claimants issued proceedings in negligence for personal injury and damage to property, loss of income and loss of amenity caused by alleged escapes of toxic matter by KCM from the Nchanga Copper Mine into local waterways.

A fundamental principle of English (and Australian) company law is that a company has a separate legal personality from its members. This principle applies to individual (ie, natural person) shareholders, as well as parent company shareholders vis-à-vis their subsidiaries. It is typically only in cases of fraud or evasion that the courts will allow claimants to 'pierce the corporate veil' to access corporate shareholders.

In rare cases, employees of a subsidiary have been able to pierce the corporate veil in relation to a parent company. The basis for the parent company's liability in such cases is typically its direct and close involvement in the subsidiary's operations.

This situation may change as a result of the Vedanta decision. In allowing the Zambian claimants to maintain their action against Vedanta and KCM in the English courts, the Supreme Court effectively expanded the categories of claimants who may pierce the corporate veil.

In addition to employees and victims of fraud and evasion, members of other stakeholder groups – such as local communities – may now have an avenue to direct claims to the highest levels of corporate ownership.

Increasing accountability for human rights and environmental commitments

In affirming the trial judge's (and Court of Appeal's) assessment that the Zambian claimants have a triable issue in relation to Vedanta's liability, the Supreme Court was persuaded that Vedanta exercised a sufficient level of supervision and control over activities at Nchanga Copper Mine so as to give rise to a duty of care to the claimants.

Key to that conclusion was evidence of an 'Embedding Sustainability' report published by Vedanta. In the report, Vedanta asserted its responsibility for the establishment of group-wide environmental control and sustainability standards, and for the implementation of a compliance program.

In this respect, the Vedanta decision could have wider implications for companies that make public commitments regarding their responsibilities to communities and the environment, and then are alleged to have failed to put these commitments into practice.

It remains to be seen whether this decision has a chilling effect on the publication of such material, but there is certainly a tension between heightened stakeholder expectations on corporate social and environmental commitments and this emerging litigation risk.

If you would like to find out more about how Allens can assist on Business & Human Rights and Corporate Governance, Risk & Compliance issues, please do not hesitate to get in touch.