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Recent high-profile cases of environmental degradation and human rights abuses by multinational companies have underscored the importance of supply chain due diligence. These incidents highlight that even the most diligent businesses can face malpractice risks within their supply chains.
Increased risk due to ESG regulations
The introduction of Environmental, Social, and Governance (ESG) laws and regulations, aimed at mitigating and preventing such harms, has imposed extensive and complex compliance requirements on businesses. These regulations apply to their own operations and throughout their supply chains. Non-compliance or misrepresentation of ESG credentials by suppliers can lead to regulatory fines, reputational damage and civil liability.
Legal landscape and corporate liability
The English courts are increasingly addressing the liability of UK corporations for the actions or omissions of their subsidiaries and suppliers abroad. These cases, which can involve significant damages, are attracting third-party litigation funders seeking substantial returns on their investments.
UK-based multinationals, or those with substantial operations in the UK, therefore need to evaluate their exposure to such claims, including their oversight or influence over foreign companies within their supply chains.
Evaluating supply chain litigation risk
Growing scrutiny from consumers, investors and regulators has heightened litigation risks for UK businesses, particularly in the industrial, manufacturing, and retail sectors with complex global supply chains involving multiple contractors. Recent UK court cases indicate where such exposure may arise:
- Corporate liability for third-party conduct
In Begum v Maran (UK) Limited [2021] EWCA Civ 325, the claimant, wife of a shipbreaker in Bangladesh who died while working on Maran's ship, alleged that Maran owed a duty of care and breached that duty by selling vessels to places where shipbreaking practices were unsafe and environmentally harmful. The decision demonstrates that the court is willing to entertain allegations of negligence brought against UK companies where the alleged violations involve a third party and occur at a distance. A break in the supply chain will not always absolve a UK company from a common law duty of care.
- Parent company liability
Lungowe v Vedanta Resources plc [2019] UKSC 20 and Okpabi v Royal Dutch Shell plc [2021] UKSC 3 highlight the potential liability of UK-based parent companies for the actions of their foreign subsidiaries. These Supreme Court decisions allowed the cases to proceed to full trial, affirming that multinational companies can be held accountable in the UK for environmental harms and human rights violations occurring in their global supply chains, particularly where they exercise significant control over their subsidiaries.
The ongoing case Municipio De Mariana v BHP Group UK Ltd & Ors [2023] EHWC 2030 (TCC), involving over 730,000 claimants pursuing BHP in the UK courts regarding the 2015 collapse of the Fundao Dam in Brazil, further underscores this trend. This action has reportedly attracted over £70 million in funding from third-party investors.
- Jurisdictional Challenges
It is not all plain sailing though. In Limbu v Ors v Dyson Technology Ltd & Ors [2023] EWHC 2592 (KB), Nepali workers brought an action against Dyson Technology Ltd for alleged labor and human rights abuses by Dyson’s Malaysian supplier. Here, however, the court declined jurisdiction, stating that Malaysia was the proper forum and that substantial justice could be obtained there.
Regulatory developments
Multinational corporations with a UK and EU market presence must constantly stay aware of the quickly evolving ESG regulatory landscape, with key developments including the EU Corporate Sustainability Due Diligence Directive (CS3D). Effective from July 25, 2024, the Directive imposes extensive risk-based human rights and environmental due diligence obligations on large companies inside and outside the EU. Companies must assess and address actual and potential adverse impacts in their operations and "chain of activities," which includes "upstream" and "downstream" business partners. Companies will not be liable if only their business partners in their chain of activities caused the damage, but if found jointly or severally liable, they may have to pay full compensation.
Mitigating litigation risks
Corporations therefore face numerous challenges in managing long and complex supply chains and ensuring compliance with ESG regulations. The following actions and due diligence processes may help mitigate potential liabilities:
- Supplier selection: Integrate ESG criteria into third-party supplier selection and evaluation to ensure alignment with the company's values and standards. Suppliers should have strong ESG ratings.
- Code of conduct: Develop and enforce a robust supplier code of conduct that sets out minimum ESG standards and expectations.
- Supply chain scrutiny: Conduct regular and thorough audits of third-party suppliers to check contract viability and assess compliance with relevant ESG regulations and standards. Include reasonable termination and alternative dispute resolution clauses in contracts.
- Alternative suppliers: Develop relationships with multiple suppliers to buffer against potential supply chain disruptions.
- Technology: Use integrated supply chain management software to integrate ESG criteria into supplier evaluation and to aid compliance and ongoing monitoring.
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Insurance and reinsurance
United Kingdom