Holding Multinational Corporations to Account: Barriers and Opportunities in the Current State of Play

William Meade    11.12.2017

Multinational corporations headquartered in the UK operate via subsidiaries all over the world. When UK companies are linked to human rights abuses in the jurisdictions in which they operate it is essential that victims can still access judicial remedy, and that the UK-headquartered parent company is held to account. Due to weak regulatory regimes in developing countries in which the harms are incurred, remedy and accountability is normally only possible in UK courts. At present, there are significant barriers to justice of this kind.

If multinational corporations cannot be held accountable they will continue to act with impunity in jurisdictions with weak regulatory regimes. The results of this lack of accountability can be devastating. In Nigeria, for instance, Shell’s oil spills have destroyed the local environment, with environmentalists suggesting that it might take 21,000 years to clean the Niger Delta at the current rate. The spills have also massively impacted the health and livelihoods of local communities. One recent study found that in Nigeria, the babies of mothers who live near an oil spill had twice the risk of dying before they reach a month old.

On the 28th of November, Leigh Day, a law firm specialising in international litigation of this kind, hosted a panel discussion on barriers to corporate accountability and developments that might provide opportunity for change. Speaking at the event was Anne Van Schaik, Sustainable Finance Campaigner at Friends of the Earth Europe, Daniel Blackburn, Director of the International Centre for Trade Union Rights, Peter Frankental, Economic Relations Programme Director for Amnesty International UK, and Daniel Leader, Partner at Leigh Day. With many campaigning groups and NGOs present, the panel discussed possible strategies and opportunities for overcoming the current barriers to accountability and remedial justice.

Currently, there are four barriers to remedial justice through UK courts for victims of human rights abuse committed by multinational parent companies’ (MPCs) subsidiaries:

  1. Defendants often argue forum non conveniens, that is, that the UK courts ought not to try a case related to harms incurred in a different jurisdiction.
  2. The ‘corporate veil’ makes it difficult to ascribe liability to the parent company for actions committed by subsidiaries. This is because subsidiaries have a different corporate personality, often registered in the jurisdiction in which they operate, not the UK.
  3. Relatedly, under current UK case law, ascribing liability to MPCs has depended on whether ‘the pleading represents the actuality’. Yet to prove the ‘actuality’ requires evidence that it is difficult to get MPCs to disclose.
  4. The financial risk involved in these cases makes them unappealing to law firms. The cases are often lengthy and expensive with high prospects of failure. Moreover, changes in the UK civil legal costs regime under LASPO have been disadvantageous to human rights and modern slavery claimants.

Recent developments in UK case law have improved the situation of (1.) and (2.), although there are reasons to be concerned about the future of these improvements. But whilst (3.) and (4.) present the greater challenge, there are opportunities on the horizon for overcoming these barriers.

1. The use of forum non conveniens

In cases of this kind, defendants often argue that the UK is an inappropriate jurisdiction in which to try these cases. They argue that the jurisdiction of harm is the more appropriate, despite the often limited access to justice in developing countries. However, due to the interpretation of article 4 of the Brussels regulations in Owusu v Jackson, this argument has been dismissed in the recent cases. Article 4 states that if the UK-domiciled company is party to the claim, then the defendants cannot invoke the principle of forum non conveniens.

Therefore, if a real issue between claimant and parent is established, that is, if there is the possibility of MPC liability for harms incurred and so the MPC is party to the claim, then UK courts are an appropriate forum in which to try the case. Through the parent company acting as a ‘gateway’, UK courts can then exercise jurisdiction over the subsidiary, even if it is not domiciled in the UK.

At Leigh Day’s panel discussion, Daniel Leader argued that because of the weak regulatory regimes in developing countries civil law cases in the MPC’s jurisdiction are the only meaningful route to remedy. Others, however, worried that in the long term this would limit the ability of developing countries to strengthen their own routes to remedy. In response, Leader pointed out that many of these cases are first taken to local courts, reiterating that with the influence these companies often have over local governments, victims seeking remedy and accountability have no other option than to take their case to the UK.

Yet the concern is a genuine one – in Vedanta the court stated that ‘there must come a time when access to justice in this type of case will not be achieved by exporting cases, but by the availability of local lawyers, experts, and sufficient funding to enable the cases to be tried locally’, suggesting that the courts may in future be less inclined to hear these cases for those very reasons. And this is all to put to one side, as Leader himself pointed out, worries about the status of forum non conveniens after Brexit given Brussels regulations are EU law.

2. The ‘corporate veil’: legal accountability of MPCs

A further argument used by defendants in cases such as these is that the MPC is not liable because it exists as a separate corporate entity to the subsidiary. In recent cases, however, including Chandler and Vedanta, there have been moves towards the development of a legal doctrine of parent company liability. At the panel discussion, Daniel Leader explained some of the ways in which these cases, including those Leigh Day have worked on, have helped develop this doctrine.

The ruling in Chandler stated that MPC’s might be liable for harms incurred by subsidiary employees if:

  • Their businesses are similar in nature.
  • The MPC has/ ought to have superior knowledge of health and safety in subsidiary operations.
  • The MPC has/ ought to know system of work is unsafe in subsidiary operations.
  • The MPC did/ ought to have foreseen that the subsidiary would rely on MPC’s superior knowledge.

In other words, if the MPC has effective control over the health and safety aspect of procedures and operations in the subsidiary, then it may have a duty of care to the employees of that subsidiary. In such cases, MPCs cannot argue that they are merely majority shareholders in a separate company for whose actions they ought not to be held liable.

In the recent Vedanta ruling this doctrine was clarified. There, LJ Simon wrote, obiter, that the MPC may have a duty of care not only to the employees of that subsidiary, but also to the local community or environment. Again, in line with the reasoning in Chandler, this would depend on whether ‘the pleading represents the actuality’.

One question that arose in the discussion, however, was whether these civil law cases could push companies to distance themselves from their subsidiaries and supply chains in order to prevent themselves incurring a liability. The worry was that companies could be discouraged from performing human rights due diligence required under various soft law instruments including the UN Guiding Principles, for fear that under UK case law they would be more likely to be held liable for the actions of their subsidiaries. This could lead to a higher incidence of human rights abuses, and less accountability.

An alternative response to the fear of incurring liability might be for UK-headquartered businesses to push due diligence requirements down onto their subsidiaries, who may in fact be better placed to mitigate against human rights risk. However, the overall response from the panel was that these civil law cases must be accompanied by mandatory human rights due diligence (MHRDD) requirements to prevent companies further shirking their existing obligations.

3. Difficulties with disclosure and evidence

Under (1.) and (2.) the claimants need to establish two things in order to ensure their claims are not struck out: 1. That the MPC is party to the claim and therefore the UK courts are the appropriate jurisdiction in which to try the case. 2. That the MPC is potentially liable despite being a separate corporate entity to its subsidiary; (2.) is essential for ensuring (1.).

However, to establish that ‘the pleading represents the actuality’ the claimants require a great deal of evidence, often in the form of documents held by the defendants. It is essential, therefore, that the claimants are able to obtain this information through disclosure.

Recent legislative changes have made forcing disclosure of this kind more difficult. Under LASPO, the principle of ‘proportionality’ usually mandates that costs ought to be lower than damages. In addition, EU regulation 864/2007 (Rome II) specifies that damages must be awarded in accordance with the law of the jurisdiction of harm; in most cases this will lower the quantum than they would have been otherwise. Because of the combined effect of these two changes, it is easier for defendants to claim that disclosure costs are too high – the principle of proportionality means that judges will be sympathetic to these arguments given the low prospective damages. Additionally, as in the Shell case, the judge may make a ruling on whether the UK courts can hear the case before the claimants have had the chance to demonstrate the de facto control the MPC has over its subsidiary.

On these issues the panel was again unanimous: MHRDD laws are the best means of overcoming this problem and ensuring that there is a strong, and public, evidential basis for proving MPC liability. Moreover, MHRDD would offer companies the advantage of an opportunity to discharge their liabilities.

Some, including Anne Van Schaik and Daniel Blackburn, suggested that the ongoing UN treaty process aiming to develop a binding instrument offered the best opportunity for MHRDD. Marilyn Croser, Director of CORE, has argued that although the treaty process has been crucial in raising the temperature on the issue, national initiatives are still important. A recently launched website documenting global developments on mandatory due diligence and parent company liability, www.bhrinlaw.org, shows that there is real momentum behind this issue in many different jurisdictions.

In the UK, Leader maintained at the discussion, reform of the Modern Slavery Act, currently mandating reporting on incidence and risk of modern slavery in subsidiaries and supply chains but without fines for non-compliance, remains the most politically tenable way of developing MHRDD.

In March 2017, the Joint Committee on Human Rights released a report which made the following recommendations given the difficulties with disclosure:

  1. Legislate for MHRDD in line with the £36million threshold found in the Modern Slavery Act. Additionally, the Modern Slavery Act ought to be amended to ensure that the content of reports published under section 54 is made mandatory. Combined, these changes will increase access to justice because a greater deal of evidence needed in these claims will already be available. The due diligence requirements would also help establish an implicit duty of care. The recent French MHRDD legislation might serve as a model.
  2. In majority shareholding parent companies, reverse the burden of proof so that duty of care is presumed until proven otherwise. It will then be up to the MPC to provide documentation/ evidence proving that they do not have effective control as discussed above. In addition, documents in possession by such subsidiaries ought to be presumed to be under control of the MPC.
  3. Reform Rome II to ensure non-application of 14.3 in claims arising from allegations against commercial organisations of human rights abuses, environmental damage or modern slavery.

We are currently awaiting the government’s response to this report which is due before the end of the year. It is evidently crucial that this response is followed up by campaigning groups, and that thought is given to how MHRDD legislation could be formulated without undermining the developments in parent company liability case law.

4. Difficulties with financing legal costs

Another barrier to justice in these cases is the difficulty of funding them. These cases are often dragged out over 3-5 years and, given the location of the claimants and harms incurred, logistically complex. Moreover, the defendants are extremely wealthy multinational corporations, able to afford top commercial firms to represent them. At the panel discussion, Peter Frankental explained how given the current UK civil legal costs and aid regime introduced under LASPO in 2013, the financial risk of taking these cases is too high for most firms.

Under LASPO three changes worsened the financial viability of these claims:

  1. Shift in where ATE premiums are recovered. Previously, ATE insurance premiums were recoverable from the defendant as part of overall costs. This was abolished by LASPO. ATE insurance is essential in these cases as, without legal aid, firms must operate on a ‘no win, no fee’ basis.
  2. QOCS not extended to HR’s and MS claims. QOCS mean that under certain personal injury claims the defendants cannot recover their costs from the claimants if they win. The idea is that the shift in where ATE premiums where recovered is balanced by QOCS. But human rights abuses, including human trafficking and forced labour, are not covered by QOCS, leaving them to be effected by ATE premium recoverability changes, but not protected by the balance in the legislation.
  3. Success fees no longer recoverable from defendants. Prior to LASPO, the fees that law firms charge upon winning a case were recoverable from defendants. They must now be paid out of damages awarded.

Additionally, Rome II has reduced the size of damages that can be won in these cases, as discussed above. Apart from making these cases less financially viable, small damages awarded are also simply absorbed into the cost of business for large companies, limiting their deterrent effect.

At the discussion, Frankental brought the audience’s attention to the forthcoming LASPO review that the government announced in October. One viable change that could be made would be to extend QOCS to HR’s and MS claims. QOCS fall under the Civil Procedure Regulations, and are formulated and changed by the CPR Committee. Extending QOCS would therefore not require primary legislation, but a statutory instrument. The review may well be an opportunity to change some of these costs funding regimes, making the cases more financially viable.

Even more recently, the Joint Committee on Human Rights has called for submissions to a new inquiry on the enforceability of human rights. Included in the parameters of this inquiry are the effects of LASPO on access to justice for human rights cases. This may be an additional opportunity to criticise LASPO’s funding regime for human rights cases more widely.