ESG risks in your supply chain? English courts increase accountability of companies that fail to manage risks across their supply chains

Published: 28/10/2021

In Begum v Maran (UK) Ltd [2021] EWCA Civ 326, the Court of Appeal unanimously held that a UK company’s duty of care could extend to the actions of overseas third parties in its supply chain, opening the door for further claims against companies for harm suffered in their supply chains, even where the act of a third party intercedes.

Viewed in combination with the landmark ruling on parent company liability for the actions of foreign subsidiaries in Vedanta Resources plc v Lungowe, the decision highlights the growing risks for companies with operations overseas and complex supply chains as well as the urgent need for ESG-led corporate agendas and improved governance through policies and procedures.

Read more from our ESG series: The Shift to Mandatory Corporate Responsibility – Understanding your Risk

The Facts

On 30 March 2018 Mr Mohammed Khalill Mollah was working on the demolition of an oil tanker (the "Vessel") at the Zuma Enterprise Yard in Bangladesh when he tragically fell from the Vessel and died. His widow, Ms Begum, brought a claim against Maran (UK) Ltd ("Maran"), an English Company, for damages arising from Maran’s breaches of a duty of care towards Mr Mollah. Maran was acting as agent for the Vessel’s registered owner, Centaurus Maritime Enterprise ("CSME") who had in 2017 sold the Vessel to another shipping company, Hsejar Maritime Inc ("Hsejar"), for scrap. The Vessel had been duly transported to the Zuma Yard in Bangladesh, where it was demolished. It was during that demolition that Mr Mollah lost his life.

Issues before the Court of Appeal

After Ms Begum had issued her claim, Maran applied for reverse summary judgment under CPR Part 42.2 and strike out under CPR 3.4 on the basis that the allegation that Maran held a duty of care over Mr Mollah was bound to fail. Mr Justice Jay refused that application but did grant permission to appeal on the issue as to the existence of a duty of care (as well as two limitation issues, which are not addressed in this blog). Maran duly appealed. Mr Justice Jay’s judgment can be found at [2020] EWHC 1846 (QB).

During the appeal 8 key factual assumptions were made:

  1. the Vessel needed to be scrapped;
  2. Maran had a choice whether to sell the Vessel to a buyer who would convey it to a shipbreaking yard which was either safe or unsafe;
  3. Maran had autonomy over that sale;
  4. Maran knew from the price paid that the Vessel was going to end up in Bangladesh (and on the beach where Zuma is located);
  5. Maran knew that the safety record in the area of Bangladesh Zuma is located was egregious;
  6. taking the previous assumptions together, Maran knew it was exercising a choice in selling to a buyer who would not demolish it safely;
  7. it was "inevitable" that Mr Mollah would be exposed to a risk of personal injury and "only foreseeable" that he would sustain a serious accident; and
  8. the role of Hsejar is of minimal or no significance as they did not alter or change the Vessel in any way.

Duty of Care Route 1– Donoghue and Stevenson

The first route to a duty of care argued by the Respondent was based on the classic Donoghue v Stevenson principles. In the appeal (as in the court below) counsel for the Respondent argued that a duty of care would arise from Donoghue v Stevenson, in that Maran’s relationship to Mr Mollah was sufficiently close, and Maran had sold a dangerous product directly to a dangerous shipbreaking yard. The main difficulty with this argument, as expressed by Coulson LJ, was that, unlike the snail in Donoghue v Stevenson, the Vessel itself was not inherently dangerous: it was its demolition (and the location of that demolition at Zuma) which was dangerous. That would potentially move the case outside of Donoghue v Stevenson as the harm would be ‘merely foreseeable’ and so insufficient to impose liability (following Home Office v Dorset Yacht Co Ltd [1970] AC 1004).

Despite these misgivings, Coulson LJ was clear to state that although arguments on Donoghue v Stevenson may not be straightforward, he could not conclude that they were so fanciful that it should be struck out.

Duty of Care Route 2 – Creating a State of Danger

The second route to a duty of care argued by the Respondent was "creation of danger" exception to novus actus interveniens. That exception is a way for the courts to impose liability on a defendant for actions done by a third party, where a defendant is responsible for a state of danger exploited by a third party. Coulson LJ commented on a growing recent trend in cases which relied on this exception, particularly those against public bodies and local authorities.

Although Coulson LJ stated, by reference to the cited cases, that it would "only be in a relatively extreme case" that the creation of danger exception would be engaged, he went on to say that in his view, the underlying factual assumptions are such that are capable of triggering the exception. Those factual assumptions had Maran playing an active role to sending the Vessel to Zuma and, in doing so, knowingly exposing workers including Mr Mollah to the significant dangers therein.

Although, as Coulson LJ conceded, that this case would be an "unusual extension of an existing category of cases", it would not be an entirely new basis of tortious liability. In its basic ingredients, there is necessary foreseeability and a relationship of proximity. The creation of danger route was therefore arguable and not fanciful.

Lessons learned / conclusion

The Court of Appeal’s dismissal of the Appeal is of wider import. It is now clear that the Courts will, in the right circumstances, entertain a claim based on a duty of care against UK company for harm caused by third parties in that company’s supply chains.

As is usual for duty of care cases, the particular factual matrix of each case will be of paramount importance. Fortunately, the assumed factual factors Coulson LJ based his judgment on give a helpful indication of what kind of elements a Court may entertain. Perhaps the most illuminating of these is the extent to which the Defendant made a sale relevant to known industry practices and standards – in this case that it was known that the price the Vessel was sold for meant that the seller knew the Vessel would end up being demolished in an area of Bangladesh with shocking health and safety records. In that regard, it is interesting that Coulson LJ held minimal weight to a clause in the Vessel’s sale agreement whereby the demolition would be conducted "in accordance with good health and safety working practices", but instead trusted evidence that, in practice, such clauses were routinely ignored and the reality was Hsejar could breach that clause without risking any sanction from its counterparty.

Although the full ramifications of this judgment await a full trial on the facts, shipping is but one industry that should be alive to the potential ramifications of this judgment. There is no reason why the Court of Appeal’s reasoning in this case may not equally apply to several different industries’ supply chain issues as reported recently in the news, for example, the ‘fast fashion’ industry. Taken together with the growing trend of holding companies responsible for ESG failures, particularly where they cause social or environmental harm, companies and directors should take appropriate advice and carefully consider what steps need to be taken to ensure their supply chains are well supervised and managed, and above reproach.

This case fits into the wider and growing shift from the historic voluntary nature of ESG compliance to a more mandatory system with real legal responsibility.

Some of these issues have been covered by us in other blogs and articles, including Tim Ellliss, Daniel Levy and Olivia Gare’s article on when parent companies can be found liable for the actions of their subsidiaries. For a wider view, interested parties are advised to read Anna Brownrigg’s blog on ESG vulnerabilities for directors.

For more information on ESG, please visit the ESG page or contact Tim Elliss and Anna Brownrigg.

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