Multinational companies can be liable for environmental harm caused by their subsidiaries | In Principle

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Multinational companies can be liable for environmental harm caused by their subsidiaries

On 18 December 2015 the Dutch Court of Appeal at The Hague issued an interim judgment in a closely watched case concerning liability for environmental injury caused by an oil spill from Shell’s pipelines in Nigeria.

Multinationals operate in various countries through local subsidiaries. If the activity of the subsidiary results in damage to the environment, as a rule it is the subsidiary that is liable. The defendant in the case is the subsidiary, and the dispute is conducted before the courts of the country where the subsidiary is based and where the injury occurred.

But this setup does not function satisfactorily if the subsidiary operates in a country whose justice system works deficiently and ineffectively. In such instances the valid question arises whether the global group which reaps the benefits from the activity conducted by its subsidiary should not be liable for injury caused by the subsidiary. Injured parties therefore seek to pursue their rights by suing the subsidiaries before the courts in the countries where the parent companies are based, or assert claims directly against the parent companies. The Court of Appeal at The Hague (Gerechtshof Den Haag) held in December that this is admissible.

A similar case is pending before the courts in the UK. On 2 March 2016 the English High Court upheld its own jurisdiction in a dispute initiated by two Nigerian communities concerning oil spills from pipelines operated by a Nigerian subsidiary of Royal Dutch Shell Plc. In January 2015 a settlement was reached in a similar case, also before an English court.

The reasoning of the courts in these cases should be examined, as the rulings clearly set a precedent and more cases of this type should be expected in the future.

Claims of Nigerian farmers

The case ruled on in December by the Court of Appeal at The Hague was commenced by Nigerian farmers and fishermen whose fields and ponds were polluted as a result of an oil spill from a pipeline operated by Shell Petroleum Development Company of Nigeria Ltd. The injured parties, supported by the organisation Milieudefensie, filed a complaint with a court in the Netherlands, where the holding company of the Shell group, Royal Dutch Shell Plc, has its headquarters (it is registered in the UK). They sought damages from the Nigerian subsidiary but also sought to hold the parent company liable for failure of supervision over the operations of its subsidiary in Nigeria.

The District Court at The Hague, which heard the case at the first instance, denied most of the claims by the Nigerian plaintiffs in 2013. The plaintiffs decided to appeal, and the admissibility of the appeal was upheld by the Court of Appeal at The Hague in its interim ruling on procedural issues in December 2015.

Why a Dutch court can hear a case about damage in Nigeria

The facts seemed to speak against a finding that the case could be heard by a court in the Netherlands. The injury occurred in Nigeria in connection with the activity of a Nigerian company which was the operator of the pipeline in that country. The plaintiffs were also Nigerian citizens.

The court of appeal first had to determine whether it had jurisdiction, i.e. a legal basis enabling the Dutch court to consider the case on the merits.

The framing of the complaint was decisive on this issue. The farmers sought damages from both the Nigerian company and the holding company. The court found that it had joint jurisdiction over the companies in this case under the principles of the Brussels I Regulation (44/2001) (now Regulation (EU) 1215/2012), which provides that a person may be sued in a member state “where he is one of a number of defendants, in the courts for the place where any one of them is domiciled, provided the claims are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings.”

The court held that this was the case here. There was a connection between the legal situations of the holding company and the Nigerian subsidiary. The claims arose out of the same oil spill. And hearing the cases jointly could avoid issuance of irreconcilable judgments.

The court also examined whether the “anchor” claim against the holding company was asserted artificially, merely so that the case could be heard by the Dutch courts. The court found that there was such abuse of procedure in this case, as it could not be found that the claims against the holding company were certain to fail.

The court pointed out that even if the anchor claim against the holding company later proved to be unfounded, the court’s international jurisdiction, once established, would continue under the principle of perpetuatio fori.

Dutch court, Nigerian law

The substantive law under which the claims against the Shell companies will be decided is the law of Nigeria, where the injury occurred. This means that whether damages can be sought against both the subsidiary and the holding company will be determined by Nigerian law.

Under Nigerian law, the operator of the pipeline will not be held liable if the oil spill was caused by sabotage. The operator of the pipeline can be held liable only if the oil spill resulted from its negligence, e.g. from insufficient maintenance or unsafe operation of the equipment.

It will also be determined under Nigerian law whether the holding company exercised adequate supervision over the operations of its subsidiary.

Preliminary ruling

The Court of Appeal at The Hague pointed out that the liability of the parent company for failure of supervision cannot be excluded in advance. This ruling sets a precedent, because it permits a suit to be pursued against the holding company and allows the suit to be filed against both the holding company and the subsidiary in the country where the holding company has its headquarters. This opens the way to seeking damages not only before the courts of the place where the immediate harm to the environment occurred, and not only against the company directly involved in the harm. The first aspect is particularly important, because often the legal systems in the countries where the harm occurs do not ensure universal and effective access to justice, and the courts in those countries are not always free from pressure by the local authorities or interest groups.

But allowing a suit against the holding company requires careful consideration by the court, bearing in mind that the Nigerian company is a separate, autonomous entity and considering whether the holding company had the relevant knowledge, capabilities and means at its disposal to undertake effective intervention at the site of the oil spill.

Also notable in the interim judgment by the court of appeal is its ruling on whether Shell had to turn over documents concerning the group’s internal procedures. The documents were sought by Milieudefensie in its attempt to show that the holding company knew about the oil spill and did not take adequate measures to prevent or mitigate the resulting damage. The court granted this request with respect to certain types of documents. However, to protect the confidentiality of information in the documents, they are to be made available at the offices of a notary under the stipulation that only the parties’ attorneys, court-appointed experts, if any, and the members of the court of appeal dealing with the case may take cognisance of the contents.

Why is this case so important?

The further course of the proceedings in the Dutch case, and the ruling ultimately issued on the merits, is worth following. So far the court of appeal has issued only a procedural ruling, but the case has already set a milestone for consideration of cases involving the liability of multinational corporations for environmental damage.

First, the ruling highlights the importance of environmental policies and standards adopted by multinational groups. The court pointed out that Shell promotes itself as a group complying with environmental standards and seeking to ensure that its goals are pursued consistently by all companies in the group. Within the group, relevant goals and a coordinated environmental policy have been adopted, and, according to corporate marketing materials, fulfilment of corporate environmental protection standards is continually monitored. According to the court, this could prove highly relevant when the case is heard on the merits.

This means that corporate environmental policies are not just slogans without legal significance, but can affect how legal rights and obligations are determined and the scope of the companies’ legal liability. This significance of the environmental policies of global concerns has not been noticeable before. The ruling by the Dutch court could thus lead to a review of such policies and greater care in formulating groups’ ambitious environmental goals. This will be a positive development as corporate policy in the area of environmental protection becomes realistic and verifiable. It also means that multinationals will have to pay much closer attention to compliance with their own standards by all entities in the group, avoiding double standards.

Second, the ineffectiveness of the existing regulations governing civil liability for environmental damage has once again been revealed. The legal system in Nigeria apparently does not enable effective enforcement of such claims, forcing the plaintiffs to pursue a complex international legal structure and seek justice outside their own country.

Third, the decision to order discovery of internal documents of the group should be regarded as precedent-setting, helping equalise the chances of plaintiffs and defendants. Plaintiffs generally have limited information at their disposal, preventing them from proving injury, causation and other facts supporting the defendant’s liability.

Fourth, the liability of international corporations is becoming truly international. Companies in multinational groups could be held liable in various countries for their activities in different parts of the world.

Fifth, another tool for enforcing this liability is appearing. The existing norms are fragmentary and ineffective. Civil liability as regulated by international agreements is limited to certain types of activity and conditioned on the given country being bound by the provisions of the agreement and on implementation of relevant national regulations. Meanwhile, liability under European law (as specified in the Environmental Liability Directive) has a limited geographical scope. National regulations often prove inadequate when it comes to imposing liability for cross-border or global harm. Attention should also be drawn to establishment of responsibility within the system of human rights protection, where the right to a clean environment is more and more strongly stressed. But here as well, enforcing claims is difficult.

Another challenge faces the theory and practice of law: providing effective means to ensure that private entities and international corporations bear true responsibility for harm to the environment, before it is too late.

Martyna Robakowska, Dominik Wałkowski, Environmental Law Practice, Wardyński & Partners