Piercing the Corporate Veil: Can Shell be Held Liable for Oil Spills in the Niger Delta?

By Rachel Chambers, Tara Van Ho and Anil Yilmaz-Vastardis

In 2008, two massive oil spills damaged the environment, and the economy, in the Niger Delta region of Nigeria, particularly affecting local fishing communities. The pipeline was being maintained and run by Shell, the oil giant headquartered in London and the Netherlands. Shell’s Nigerian subsidiary took responsibility for the two large spills, but the company has denied liability for smaller spills in the area, blaming these on sabotage. The Bodo Community – who were particularly affected by the smaller incidents – sued Shell and its Nigerian subsidiary (“Shell Nigeria”) in the UK, seeking compensation for damages they sustained. The claim against the parent company was dismissed upon agreement with the claimants, but the case against Shell Nigeriais still pending.

According to documents recently submitted to the High Court of England and Wales, the management of Shell Nigeria knowingly overlooked the deterioration of pipelines for years before the two catastrophic oil spills in 2008. The documents suggest that some or all of the earlier spills were likely the result of Shell Nigeria’s failure to maintain the pipeline. This raises a question about what Shell, as the parent company, was responsible for. In a 2011 report, the Essex Business & Human Rights Project (EBHR) took account of evolving laws to analyse the potential forms of liability facing Shell and Shell Nigeria for damage done in the Niger Delta. As established in the EBHR report, lawsuits have been filed in the US and Europe for a several reasons, including a lack of trust in the Nigerian courts, the excessive length of the litigation process, and failures or an inability to enforce judgments due to the subsidiary not having sufficient assets.

Filing a lawsuit outside Nigeria for the damage caused by the spills requires either proving that Shell as the parent company was responsible on its own, or establishing joint responsibility between the parent and its Nigerian subsidiary. This presents the main challenge for claimants: holding the parent company liable for the failures of the Nigerian subsidiary. In the Bodo Community case, Shell submitted to the jurisdiction of the UK courts only for the claims against the subsidiary and not the parent. In the Netherlands, in contrast, Shell unsuccessfully argued that the court did not have jurisdiction to hear the case. The court found the parent company could be sued for the damage, but on the merits found it was not liable for the damage.

Traditionally, the separation of corporate personality – or the “corporate veil” – means that parent companies, such as Shell, have not been scrutinised for their involvement in the (mis)deeds of their subsidiaries, in this case Shell Nigeria. This position was been challenged through a series of cases brought before the English courts in the 1990s and early 2000s in which parent companies were alleged to have breached duties of care to claimants affected by the actions of their subsidiaries.  The landmark Court of Appeal decision in the 2012 case of Chandler v Cape set out the appropriate circumstances in which the law may impose on a parent company responsibility for the health and safety of its subsidiary’s employees.  Its reasoning could be applied to argue for the general development of a parent company duty of care towards third parties affected by the operations of subsidiaries located elsewhere that embraces, but goes beyond, health and safety.

If this reasoning is applied, the next question is necessarily what duty of care would be expected for Shell when operating in Nigeria. Starting 1 December 2014, the UN Working Group on Business and Human Rights will host its annual forum, which will focus on the international human rights expectations for corporations like Shell. The UN Guiding Principles on Business and Human Rights (“Guiding Principles”) were adopted unanimously by the UN Human Rights Council in 2011, and include a corporate duty to respect human rights. The Guiding Principles incorporates a “do no harm” philosophy for business entities, relying principally on the notion of corporate due diligence to identify and mitigate human rights impacts.

While the Guiding Principles are not binding and post-date the environmental and human rights harms which occurred in theBodo Community case, they represent a best practice that has existed for some time, particularly in the oil and gas sector. That best practice includes conducting and acting upon human rights and environmental impact assessments, which could have provided transparency or accountability for the deterioration of the pipelines which Shell now stands accused of having knowingly overlooked.

The expectation under the Guiding Principles is that a company will conduct due diligence – the identification, prevention and mitigation of human rights concerns – throughout its activities, including in its relationship with other businesses. Questions remain: when and to what extent does this apply to the parent-subsidiary relationship? Many multinational corporations are developing their human rights systems at the parent level. As the EBHR report details, in its 2010 securities filings, Shell indicated it had taken this approach – standards for spill prevention and clean-up were set at the group-wide level. Does this mean that the parent company has greater obligations to insist a subsidiary act in a certain way?  What if it fails to do this? Or what if the parent company knows of a risk but fails to act, specifically because it doesn’t want to undertake an action that would give rise to ‘piercing the corporate veil’ (this defence was raised in Shell’s filings in the Netherlands lawsuit)?

As the treatment of business and human rights is more firmly embedded in legislation and statutes, different standards for parent company liability are emerging.  What the standard should be is an important consideration for states, corporations, and victims. The EBHR will co-host a side event at the upcoming UN Forum exploring the appropriate standards for parent duty of care, the current standards, and what this means for victims. The event (14:30-16:00, Room IX) will feature talks by Professor Sheldon Leader and Tara Van Ho of EBHR, Surya Deva of City University of Hong Kong and Jernej Letnar Černič from the Graduate School of Government and European Studies (Slovenia) and will provide a theoretically sound examination of practical concerns relevant to states, corporations, and victims.

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