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The challenges and opportunities of corporate accountability litigation

02 January 2018 #Supply Chain Governance #Outsourcing & Supply Chain


There is evidence to suggest that some UK based transnational corporations are either actively engaged in, or negligently permitting, illegal or unethical labour abuses in their international operations. Often, these businesses reach into unstable or corrupt states. If lawyers are required to bring cases against subsidiaries of UK based corporates in such states, there is a real risk that they would not succeed and / or that any judgment obtained would not be honoured. There is now an appetite to bring high-profile cases in the UK, as the justice system is fair, where the media is willing to cover the case and the corporate head office, with its financial resources, resides. If lawyers could successfully bring such cases, it would send a message to companies that they cannot subcontract human rights abuses with impunity.

However, it will not be straightforward. English law has long upheld the principle of the ‘corporate veil’. In short, this means that corporations have separate legal personalities and one company cannot be held liable for the wrongdoing of another company. This is important for transnational corporations who may operate in unstable or corrupt parts of the world; 'head office' wants to know that it will not be on the hook for bribery or abuse by their overseas subsidiaries. There are some sound legal reasons for this separation of legal accountability but if companies pay insufficient attention to the activities of their international networks, it could facilitate the ‘outsourcing’ of human rights abuses.

This raises an important legal question. If a UK based transnational corporation can effectively turn a blind eye to wrongdoing by its subsidiaries and is insulated from liability by the corporate veil rule, how is it possible to hold them to account? One answer may lie in a relatively recent line of cases in the tort law of negligence. It is perhaps ironic that legal progress may come from the common law as opposed to recent statutory initiatives, such as the Modern Slavery Act, but it could be interesting nonetheless.

The key case is that of Chandler v Cape [2011] 1 WLR 3111. I will not rehearse the facts here, suffice it to say that the claimant sought redress from a parent company in circumstances where the subsidiary, which directly employed him, no longer existed. It was a health and safety case and the claimant successfully argued that there are some limited circumstances in which it is appropriate for a parent company to be held liable for the wrongdoing of its subsidiary.

Since the Court of Appeal decision in 2012, several environmental and general human rights groups have sought to use this principle to hold UK transnational corporations to account. The most recent of these, Lungowe and others v Vedanta resources and Koncol Copper Mines PLC [2017] EWCA Civ. 1578, was considered by the Court of Appeal. As a result of this decision, which was a dismissal of an attempt by Vedanta summarily to strike out the case, the matter will now be heard in full this year.

To succeed in a vicarious corporate accountability case, a claimant will need to meet the tests set down by Arden LJ in the Chandler v Cape appeal. Those tests are:

  • That the business of the parent and subsidiary company are substantially the same.
  • That the parent has or ought to have superior knowledge of the health and safety violation (in our case, labour abuse), vis-a-vis the subsidiary.
  • The subsidiary’s system of work is unsafe and the parent knew or ought to have known that it was unsafe (e.g. that the subsidiary was intentionally or recklessly engaging in abusive labour practices).
  • That the parent knew or ought to have foreseen that the subsidiary would rely on the parent intervening to protect the employees from the unsafe system.

As these tests were devised in relation to a health and safety case, they may not be strictly applied to a labour abuse case. However, they are the framework within which lawyers must currently work.

Whether these tests can be met in relation to a corporate failure to prevent labour rights abuses by subsidiaries overseas will depend on the strength of the evidence in each individual case. There is currently no precedent for such a case, but in theory there is no reason why the Chandler v Cape principles could not apply to labour abuses. We know that bonded and forced labour practices are rooted in systemic failures within corporate supply chains. As large UK based companies have obligations under the Modern Slavery Act to investigate their supply chains, they must know (or ought to know) of their vulnerability to modern slavery practices and will have published compliance statements. Such statements may help investigators identify weaknesses in systems and procedures that could give rise to evidence to meet the Arden tests.

This is still very much a work in progress and the success or otherwise of future vicarious corporate accountability litigation will turn on forensic investigations in quite challenging circumstances. However, the significant increase in supply chain transparency that has been fostered by mobile communications may soon result in more extensive evidence to support such cases.

For those interested in using the law as a lever of social change and those who want to see greater corporate accountability, this is one to watch.

Article written by James Sinclair, Consultant at Clarkslegal LLP

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