A rapidly developing area of the law 7 min read
Class action claims against companies alleging adverse human rights impacts are increasing globally. While damages may be sought, such claims are increasingly being used to drive change in company policies and practices. Actions are often driven by strategic litigants and backed by well-resourced non-government organisations (NGOs).
Claimants are also pursuing novel forms of group claims, with a view to bringing about changes in the law or conduct. While in the past litigants have focused on human rights impacts arising at an overseas subsidiary level, we are now seeing a focus emerge on impacts alleged to have taken place in companies' supply chains.
In this Insight, we look at this trend and the scope for similar claims to be brought in Australia in 2023 and beyond.
Key takeaways
- ESG class action claims and representative proceedings are moving beyond more traditional targets (such as parent liability for the actions of overseas subsidiaries) towards companies' broader activities, including their supply chains, with a focus on liability associated with suppliers and auditors.
- Strategic litigation in the UK, for example, is increasingly being used to place pressure on companies to address alleged human rights impacts in, and improve scrutiny of, their supply chains.
- While similar claims have not yet been brought in Australia, momentum is gathering globally, and the trend is likely to carry over to Australia in time.
- Effective human rights risk assessment, management and reporting can reduce litigation risk.
Who in your organisation needs to know about this?
Your legal, compliance, procurement and ESG teams.
Recap on novel tort group claims in the UK
Vedanta, Okpabi and other attempts to expand parent liability for their overseas subsidiaries
There have been a number of attempts by litigants in the UK to establish the liability of parent companies for alleged adverse human rights impacts at an overseas subsidiary level.
Each of the representative proceedings below was brought in negligence, with claimants arguing that the parent company owed a duty of care to the claimants, and that it should pay damages for harms suffered as a result of a breach of that duty. Such claims are novel: UK courts historically have been hesitant to hold parent companies liable for the acts of their subsidiaries, and the tortious concept of proximity has traditionally limited liability for negligence to scenarios in which the parties have a close relationship (eg supplier and purchaser).
An example of the legal relationships underlying these novel tort claims is set out below.
While we have not yet had a final decision from the UK courts on the question of whether a duty was owed by a parent company in these circumstances, there have been interim decisions that establish the jurisdiction of the UK courts to hear such claims:
- Vedanta Resources Plc and another v Lungowe and others [2019] UKSC 20: in February 2019, the UK Supreme Court found it was arguable that Zambian communities could bring a claim for alleged negligence by a UK parent company and its Zambian-based mining subsidiary. The matter subsequently settled.
- Okpabi and others v Royal Dutch Shell and another [2021] UKSC 3: in February 2021, the UK Supreme Court found it was arguable that Niger Delta communities could bring a claim for alleged negligence by a UK parent company and its Nigerian incorporated subsidiary. A further group claim was filed by communities in the Niger Delta in February 2023 and the matter is progressing towards trial.
- Bravo and others v Amerisur Resources Limited [2023] EWHC 122: In January 2023 the UK High Court found jurisdiction to consider a class action by Colombian farmers against Amerisur alleging negligence by Amerisur's Colombian subsidiary. The matter is progressing towards trial.
Tesco/Intertek litigation—the focus shifts to supply chains
Litigants are now testing whether liability in tort may extend beyond the parent/subsidiary relationship; eg in relation to impacts embedded within a company's supply chain and in relation to the involvement of certifiers and social auditors.
Facts
The UK law firm Leigh Day has brought representative proceedings against Tesco and its social auditors, Intertek, regarding alleged modern slavery practices. The claim has been filed on behalf of 130 migrant factory workers from Myanmar and alleges that the workers were subject to modern slavery conditions between 2017 and 2020 at a Thai garment factory (VK Garments) owned by a Tesco supplier (Ek-Chai Distribution System Company Limited). Clothing produced at VK Garments was sold in the UK under Tesco's 'F&F' brand.
The claim alleges that the workers worked seven days a week, were trapped in a cycle of forced labour and debt bondage, and were unable to take breaks. It is alleged that audits by Intertek on behalf of Tesco between 2017 and 2020 failed to identify modern slavery or forced labour conditions at the factory.
Leigh Day's press release announcing the claim states that in 2020, the workers filed a complaint with the Thai Department of Labor Protection and Welfare regarding the factory's failure to pay workers full wages. However, the Department rejected most of the workers' complaints on the basis of the Intertek audits.
Legal claims
The Tesco/Intertek litigation closely follows, and builds upon, the UK Court of Appeal's decision in Begum v Maran (UK) Ltd [2021] EWCA Civ 326 in March 2021. That case considered the nature and extent of any duty of care owed by a company to workers in its supply chain, including beyond first-tier suppliers.
In the Begum decision, the UK Court of Appeal found it was arguable that the widow of a shipwrecker could bring a claim for alleged negligence against Maran (UK) Ltd. Maran had sold a vessel to a demolition cash buyer, which had subsequently on-sold the vessel to a shipyard where, in the course of wrecking the vessel, the claimant's husband was killed.
The UK Court of Appeal noted that, while there would likely be some difficulties in establishing proximity of harm between Maran (UK) Ltd and the claimant's husband, owing to the involvement of the demolition cash buyer in the supply chain, proximity was at least arguable. Separate judgments of the Court of Appeal identified a number of routes by which liability could be imputed to Maran, including if it were found that the defendant had involved the cash buyer as a means to sever a potential chain of liability or if Maran had control over whether it exposed shipwreckers to the source of the danger.
The Court of Appeal's consideration of tortious liability of companies for the acts of entities in their supply chains presents a novel approach to assessing proximity for harm, and suggests an increased willingness to hold companies accountable for conduct within their supply chains.
The Tesco/Intertek litigation builds on this momentum by seeking to establish that companies and social auditors owe a duty towards workers in their supply chains. Leigh Day's claim is framed in negligence and asserts that Tesco and its Thai suppliers, Ek-Chai Distribution System Company Limited, were aware of the relevant products' origin and were also aware (or should have been aware) of the conditions at the factory, but failed to take action. It is further claimed that Tesco and Ek-Chai have been unjustly enriched, and are liable to make restitution to the workers.
Focus on ESG certification
In their claim against Intertek, the workers have asserted that Intertek was negligent in failing to identify and/or report the unlawful conditions.
The extent to which a third-party auditor or certifier may be liable in negligence for its failure to identify harm is being tested further in other recent litigation. For example, in December 2022, Leigh Day announced it had filed a claim in the London High Court on behalf of the families of two artisanal miners who died in 2019 at a mine majority-owned by the Barrick Gold Corporation. In its claim, Leigh Day has alleged the London Market Bullion Association was negligent in certifying gold produced at the mine as meeting its Responsible Gold Standard.
The Tesco/Intertek litigation also follows recent proceedings in the US against Ansell and Kimberly-Clark by 13 former migrant workers in Malaysia, who are alleging that both companies 'knew, or should have known' about modern slavery conditions in their supply chains and that both entities 'knowingly profited' from the alleged exploitation. Although not brought in tort, this is a similarly novel claim which seeks to impose liability on a purchaser for the acts of its suppliers.
Actions you can take now
Increased societal, stakeholder and strategic litigation interest in companies' accountability for supply chains continues to create litigation risk in this area, with both the Tesco/Intertek and London Market Bullion Association matters serving as examples of novel tort claims in which the litigants are seeking to highlight awareness of modern slavery concerns and place pressure on companies to improve scrutiny of their supply chains, including audits of their suppliers. As acknowledged by the UK Court of Appeal in Begum, this is a 'rapidly developing area of the law'.
Australia has not yet experienced the same attempts by litigants to establish a duty of care at the parent-company level in relation to alleged human rights harms overseas (whether at the subsidiary level or within the supply chain).
However, we are aware that Australian NGOs are actively looking for such an opportunity, in particular as regards modern slavery and forced labour allegations.
The litigation trends highlighted in this note emphasise the importance of:
- maintaining a well understood and implemented human rights policy and underlying controls;
- undertaking human rights and modern slavery due diligence on third parties;
- undertaking robust impact assessments of supply chains and broader human rights risk assessments periodically at an enterprise, asset, departmental or product level; and
- implementing effective grievance mechanisms including to address modern slavery in supply chains.
With the Attorney-General's review of the Modern Slavery Act 2018, due to be published in March 2023, now is an excellent time to revisit both your modern slavery reporting procedures and due diligence more generally. Please contact us below to discuss further.