On January 29, 2021, the Court of Appeals of The Hague found in two judgements (cases A and B and cases C and D in Dutch) Shell Nigeria (SPDC) and its parent company Royal Dutch Shell (RDS) responsible for oil spills in the Niger Delta in Nigeria.
Cases A and B (first ruling) related to an oil spill from an underground pipeline near Oruma in 2005 and cases C and D (second ruling) an oil spill from an underground pipeline near Goi in 2004 which gravely damaged the environment. Local farmers claimed that both SPDC and RDS were to be held liable for the occurrence of the spills (lack of maintenance), the lack of adequate actions once the spills occurred, and the failure to remediate them.
Subsidiary’s liability
As per its 2015 interlocutory decision, the Court of Appeal applied Nigerian law which encompasses English law and judgments by English courts ruled after Nigerian’s independence (which are not binding on Nigerian courts but have persuasive authority).
Under Article 11 (5) of Nigerian Oil Pipeline Act (OPA): a) the owner, possessor or user of land is entitled to compensation if he is adversely impacted as a result of the licensee’s activities, b) the licensee has a duty of care compelling him to protect, maintain and repair its pipelines, c) strict liability is imposed on the licensee for damage resulting from leakage to its pipeline, unless leakage is caused by a malicious act by a third party, such as sabotage (in that case, the licensee bears the burden of proof).
As claimants argued defendants’ negligence, the court recalled that under English law, a tort of negligence requires a) a duty of care, b) a breach of that duty of care, c) damage resulting from that breach. Further, the Court recalled the Caparo test used to determine whether there is a duty of care: i) is the damage foreseeable? ii) is there proximity? iii) is the presumption of a duty of care fair, just and reasonable?
Then, the court assessed first SPDC’s liability for causing the leakage. Claimants argued lack of maintenance, Shell’s defence was that the spills were caused by sabotage. While parties did not dispute that Shell had the burden of proof regarding sabotage, the standard for the evaluation of evidence was in dispute. Assessing Nigerian case law, the court found that sabotage should be proven beyond reasonable doubt.
Then, based on available information, the court considered that despite sabotage being the most likely hypothesis for the occurrence of the leakage, SPDC failed to prove beyond reasonable doubt that sabotage was indeed the cause of the spill. Thus, the subsidiary could not evade the strict liability standard of Article 11(5)(c) OPA, and it was liable for damages arising out of the spills. However, as sabotage was the most probable cause of the leakage, the court did not consider liability under tort of negligence.
Second, the court assessed SPDC’s liability for its response to the spills. In the first ruling, the court considered that SPDC breached its duty of care by not installing a Leak Detection System (LDS) while knowing that leak was likely to occur and that access to the site of leakage was likely to be refused. The court found that failure to install an LDS had undeniably resulted in significant damage as if such a system were used, the oil spill would have been stopped considerably earlier and the impact of the leak would have been correspondingly smaller (§6.25).
In the second ruling, the court found that SPDC acted negligently by not performing on-site inspection by helicopter to assess the leak on the day of the leak was discovered (October 10, 2004), but instead a day after (October 11, 2004) as this delay led to further damage (§6.11).
Third, the court assessed SPDC’s liability for cleaning up pollution. The court noted that a duty of care did not require that all pollution to be removed and then found that the subsidiary did comply with its obligation despite the oil residues still being present after the clean up.
Parent company’s liability
The court found that there was no reason to assume that Nigerian court would not follow the UK Supreme Court’s rule (Vedanta v Lungowe) according to which if a parent company knows or ought to know that its subsidiary is unlawfully causing harm to third parties in an area in which the parent company is interfering with its subsidiary, then the parent company has a duty of care towards those third parties.
Further, the court noted that for the parent company to have a duty of care, it must at least be established that its subsidiary breached its own duty of care (acted negligently). As only a duty of care violation by the subsidiary was established in connection with the response to spills, the alleged liability of the parent company can only be assessed on this matter.
In the first ruling, the court found that the parent company had a duty of care to ensure that an LDS is installed on the Oruma pipeline and breached it. In fact, internal documents, bonus policies and a witness statement showed that RDS, at least from 2010, has started to become involved in concrete the question of whether the pipelines in Nigeria should be provided with an LDS, and thus also the question of whether an LDS should be applied to the Oruma pipeline (§7.24-7.26). As a result, the court ordered an LDS to be installed on the pipeline within one year (§7.27).
In the second ruling, the court considered that the claimants did not provide sufficient evidence that the parent company knew or ought to know that SPDC had not stopped the spill until October 11, 2004 so that the claim against the RDS did not sustain (§6.18).
A landmark outcome
While it can be argued that relying on the parent company’s specific interventions in its subsidiary operations instead of its position of authority in the corporate group to find a duty of care may create an incentive for parent companies not to interfere with their foreign subsidiaries, these decisions (and particularly cases A and B) constitute a great advancement.
For the first time, on the merits, a parent company is hold liable under a common law duty of care with regards to foreign claimants, paving the way for more corporate accountability.