High Court refuses permission for climate change judicial review against the FCA for a second time

The High Court has refused environmental NGO ClientEarth’s application for permission for judicial review of the decision taken by the Financial Conduct Authority (FCA) to approve the prospectus of an oil and gas operator Ithaca Energy plc: R (on the application of ClientEarth) v Financial Conduct Authority [2023] EWHC 3301 (Admin).

This was an innovative attempt by an environmental NGO to use an existing statutory and regulatory regime to introduce heightened climate change considerations. However, the court made it clear that it was not part of the FCA’s function to evaluate the extent to which a prospectus may or may not promote climate change mitigation or net-zero targets. The court respected the discretion and decision making of the FCA as an expert regulator and limited itself to applying established public law principles despite the broader context of the climate crisis.

Although unsuccessful, the challenge highlights the increased scrutiny on climate issues and growing pressure on a wider range of regulators and public authorities who are not traditionally seen as operating in the environmental sphere.

It is also notable that the court was not prepared to classify the claim as environmental for the purposes of allowing costs protection for the claimant, which may serve to discourage other such speculative claims.

For more information see this post on our Public Law Notes blog.

Greenwashing dispute risks – International perspectives

With companies increasingly making environmental claims and a rise in ESG regulation, we outline the risks of greenwashing allegations in three key markets

Fuelled by the global spread of ESG and climate-related disclosure obligations and coupled with pressures from increasingly ESG-driven stakeholders, businesses are saying more than ever about their environmental and social performance. These statements might be product-specific, relate to investment strategy or corporate governance. Such statements might be seen as good marketing, positive for a company’s reputation and may well reflect a laudable transparency or ambition. But what are the potential legal consequences if these statements are attacked as inaccurate, unsubstantiated, misleading or false (ie, “greenwashing”)? In this article, we explore the increasing risks for a business in making environmental or social claims, focusing on the UK, Australia and the US.

The UK

The regulatory regime

As set out in our previous post, there are a number of regimes that require UK businesses to report in relation to social and/or environmental matters. Many of these derive from the EU’s European Green Deal, such as the Corporate Sustainability Reporting Directive, the Sustainable Finance Disclosure Regulation or the anticipated Corporate Sustainability Due Diligence Directive. Many of the EU regimes apply (or may apply) to entities accessing the single market and so apply directly to UK based companies. Others include references to “value chains” that will likely impact UK-based companies indirectly as the expectations of their EU business partners align with these new regimes.

There are also UK-specific reporting regimes, such as the UK Modern Slavery Act, the Task Force on Climate-related Financial Disclosures (the widely adopted voluntary standard that is now mandatory for all UK listed entities), the Task Force on Nature-related Disclosures and the International Sustainability Standards Board’s standards.

Other regulatory steps are being taken to ensure that what companies say accurately reflects what they do. In particular:

  • The EU Taxonomy Regulation establishes benchmarks for determining whether an economic activity is “sustainable”.
  • The EU Commission published a proposal for a Directive on Green Claims in March 2023.
  • The UK Competition and Markets Authority (CMA) has adopted a Green Claims Code that seeks to help businesses comply with the existing consumer protection regimes in the UK when making environmental claims. The CMA is working with the International Consumer Protection and Enforcement Network, with a view to aligning standards globally.

Investigations and litigation

There are five emerging categories of potential actions we would highlight:

  • Complaints to the EU Commission and/or CMA: In June 2023, a group of European national consumer protection organisations, supported by ClientEarth, filed a complaint with the EU Commission in relation to what they describe as misleading climate-related claims by 17 European airlines. The complainants are calling for a Europe-wide investigation. In January 2023, the CMA opened an investigation into three “fast fashion” brands to scrutinise their green claims, noting particular concerns about the way the firms’ products are marketed to customers as “eco-friendly”.
  • Complaints to the UK Advertising Standards Agency (ASA): Complaints can be made to the ASA that green claims in adverts are misleading. If the claim is upheld, the company will be ordered to remove the advert. Recent complaints have been made to, and upheld by, the ASA in relation to green marketing claims made by Ryanair (that it was the “lowest emissions airline” with “low CO₂ emissions”) and Repsol (where an advert relating to “renewable hydrogen” omitted material information.
  • Shareholder claims under the Financial Services and Markets Act: Section 90 and Section 90A of the Financial Services and Markets Act 2000 provide potential routes to redress for shareholders in a listed company that makes false or misleading claims about their response to climate change. While shareholder actions under FSMA are not new, ESG-related claims are a more recent area of focus for potential claimants. We explain these potential claims in more detail here and consider the issue of reliance under Section 90A here.
  • Shareholder derivative actions: Derivative actions under Section 261(1) of the Companies Act 2006 allow minority shareholders to bring a claim on a company’s behalf and for its benefit, typically with a view to challenging the conduct or decisions of the company’s directors. The highest profile example of such an action in relation to ESG issues was the unsuccessful action brought by the environmental charity ClientEarth against the directors of Shell, which we discuss in more detail here.
  • Consumer class actions: While we are yet to see a big rise in greenwashing class actions in the UK, claimant firms may seek to allege that misrepresentations by a business have induced consumers to make purchases that would not otherwise have been made, causing loss. These claims could be brought in the UK High Court on an “opt-in” basis (potentially following the example of the group litigation currently being pursued against vehicle manufacturers in relation to allegations concerning NOx emissions from certain diesel engines). Alternatively, claimants might seek to bring consumer claims based on alleged abuses of competition law in the Competition Appeal Tribunal, so as to take advantage of the “opt-out” regime (ie, where each member of the class is automatically enrolled as a claimant unless they take active steps to opt out). Notably, claimant firms have already sought to bring environmental claims via that route, in particular, against water companies.

Australia

The regulatory regime

Greenwashing in Australia is largely dealt with under existing legislative provisions in relation to false, misleading, deceptive or dishonest conduct, and in relation to corporate disclosure obligations and representations without reasonable grounds. Some of those provisions may be relied upon by private persons and entities, and many are also enforced by national regulators, including the Australian Securities and Investments Commission (ASIC), the Australian Competition and Consumer Commission (ACCC) and Ad Standards.

In August 2022, ASIC identified greenwashing as an enforcement priority for 2023. In November 2023, it then confirmed its focus on greenwashing will remain a priority in 2024 and indicated that focus would widen to give attention to “net zero” statements and targets and the use of such terms as “carbon neutral”, “clean” and “green”.

In its March 2023 “internet sweep” of environmental claims, the ACCC noted concerns that a significant portion of statements made by businesses may be false, misleading or have no reasonable basis, including “vague” terms including “green”, “eco-friendly”, “sustainable”, “recycled”, “carbon neutral” and “zero emissions”. In July 2023, the ACCC released draft guidance on environmental and sustainability claims.

Ad Standards, Australia’s advertising regulator, independently administers industry codes such as the Environmental Claims Code. The Code requires environmental claims to be presented truthfully and factually, not to be misleading or deceptive, and must be substantiated and verifiable. Ad Standards’ Community Panel handles complaints concerning breaches of the Code.

Litigation

In relation to private actions:

  • in August 2021, a shareholder environmental activist organisation filed proceedings against an oil and gas producer alleging that its market disclosures amounted to misleading or deceptive conduct in relation to: its 2030 and 2040 emissions reduction targets; its use of the word “clean” to describe its business and the production of natural gas; and it describing the use of hydrogen as “zero emissions” or “clean”; and
  • in August 2023, Australian Parents for Climate Action (AP4CA) filed proceedings against EnergyAustralia, challenging claims made on its website that its “Go Neutral” electricity and gas products are “carbon neutral”; emissions created by “Go Neutral” products are “cancelled out” or “negated”; and that by opting into its “Go Neutral” products, consumers “have a positive impact on the environment”.

In relation to regulator actions:

  • in February 2023, ASIC commenced its first greenwashing proceedings against Mercer Superannuation (Australia) Ltd (Mercer), alleging that Mercer engaged in greenwashing in relation to its ”Sustainable Plus” investment options because those options relevantly included investments in companies involved in the extraction or sale of fossil fuels, despite marketing statements made by Mercer to the contrary;
  • in January 2023, Ad Standards’ Community Panel upheld a complaint in relation to a flyer produced by ATCO which included the words, “Natural gas not only saves you money on hot water, cooking and heating, it’s also better for the environment” and under the subheading “Benefits” included a dot point with the words “Produce 70% less greenhouse gas”. The Panel held that this claim was misleading as there are other energy sources which produce less greenhouse gas than natural gas;
  • in July 2023, ASIC commenced proceedings against Vanguard Investments Australia Ltd (Vanguard) alleging that Vanguard had engaged in misleading and deceptive conduct because it represented that all securities in its “Ethically Conscious” fund were screened according to ESG criteria to exclude issuers with significant business activities in a range of industries, including fossil fuels, when it is alleged that Vanguard largely did not undertake that screening;
  • in August 2023, ASIC commenced proceedings against Active Super, alleging greenwashing in relation to claims that it eliminated investments from its superannuation fund that posed too great a risk to the environment and community (including tobacco, oil and gambling-related investments) in circumstances where the fund was allegedly exposed to securities in gambling, tobacco, oil and coal mining; and;
  • in March 2023, the ACCC announced it had researched 247 business and/or brands across Australia and had found that some of those businesses were: using vague or unclear environmental claims; not providing sufficient evidence for their claims; setting environmental goals without clear plans for how these will be achieved; and using third-party certifications and symbols in a confusing way.

The US

The regulatory regime

We have previously considered the SEC’s activities in this area here and here. This post, therefore, focuses on the consumer angle.

US regulatory action with respect to greenwashing claims remains fairly passive.  For the first time in more than a decade, the US Federal Trade Commission (FTC), which enforces federal antitrust and consumer protection laws, plans to release updated Green Guides for environmental marketing communications. The Green Guides, first issued in 1992 and last updated in 2012, are intended to help marketers avoid making unfair or deceptive environmental marketing claims in violation of Section 5 of the FTC Act. The revised Green Guides are expected to address current gaps in guidance with respect to claims that form the basis for modern greenwashing actions, such as claims that products are “sustainable” or “carbon neutral,” claims of achieving (or being on target to achieve) “net zero” carbon emissions, and claimed or implied endorsements from third-party organisations with strong ESG credentials. The revised guidance is expected to include examples of problematic statements and marketing, as well as the type and degree of substantiation required to defend against claims that given marketing statements are false or misleading.

Litigation

Even as the FTC works to better define the contours of false or misleading environmental claims, private class action litigation, rather than agency action, remains the principal means of regulating greenwashing in the US. For decades, plaintiffs’ firms have brought consumer fraud class actions premised on allegedly false or misleading claims that products are, for example, “healthy” or “all natural”.  Applying that same template, consumer fraud class actions have now begun to target statements that products are carbon neutral, fully recyclable, or made of recycled content, and other green or sustainable marketing claims.

Recent examples include Dorris v. Danone Waters of America, challenging Danone’s labelling Evian-brand bottled water as “carbon neutral”; Lizama v. H&M Hennes & Mauritz, challenging H&M’s use of “conscious choice” branding to market clothing made with 50% or more “sustainable materials”; and Ellis v. Nike USA Inc, similarly challenging Nike’s “Sustainability” product line. In these and other greenwashing class actions, plaintiffs allege (i) the marketer’s claim is false or misleading and (ii) the misleading statement inflated the purchase price of the product by a certain amount, as reflected in sales data and analyses by economic experts.

Like other US class actions, greenwashing class actions generally are brought by plaintiffs’ firms as “opt-out” class actions (as above, where each member of the class is automatically enrolled as a plaintiff in the action and must take steps if they wish to opt out of the class, which few people do), as consumers do not have the financial incentive to pursue these claims on an individual basis. If successful, plaintiffs’ firms can recoup a large contingent fee percentage (eg, 30% to 40%) of the class recovery, with damages calculated based upon the number of products sold with false or misleading claims multiplied by the amount by which the challenged statement inflated the purchase price.

Greenwashing class actions have seen mixed success in US courts. Some consumer fraud class actions have survived motions to dismiss because questions of fact remained as to whether the challenged statements were false or misleading and/or improperly substantiated. In other cases, courts have dismissed greenwashing claims because the challenged statements were held not to be false or misleading on their face (eg, in the Lizama case, the court granted H&M’s motion to dismiss because the only reasonable reading of H&M’s “conscious choice” marketing was that the products at issue used more sustainable materials than H&M’s other clothing, which was not in question).

Nonetheless, greenwashing class actions (and similar claims brought under state consumer protection laws by governments) are expected to continue in the US given the growing importance consumers place on ESG considerations and, as a consequence, marketers’ increased efforts to promote their brands and products based on those considerations.

To follow the rest of this series on climate change disputes, please subscribe to our ESG blog here or click here to view on our website.

Key contacts

Rachel Lidgate
Rachel Lidgate
Partner, London
+44 20 7466 2418
David Bennett
David Bennett
Partner, London
+44 20 7466 6435
Oliver Elgie
Oliver Elgie
Senior Associate, London
+44 20 7466 6446
Benjamin Rubinstein
Benjamin Rubinstein
Partner, New York
+1 917 542 7818
Chris Emch
Chris Emch
Associate, New York
+1 917 542 7838
Mark Smyth
Mark Smyth
Partner, Sydney
+61 2 9225 5440

Innovation, IP and the energy transition – Creative tensions

Reconciling the need for breakthroughs to back the energy transition with the commercial drivers required to achieve them will demand thoughtful use of IP

The scale of the change needed to tackle climate change is enormous and it is clear the global transformation to a low carbon economy will be underpinned by technological innovation. Incredibly, according to the International Energy Agency’s Net Zero by 2050 report, almost half of emission reductions required by 2050 will come from technologies currently at the demonstration or prototype stage. So, attracting investment and increasing the speed with which this technology can come to market is critical.

The Glasgow Climate Pact from COP26 focused on co-operative action on technology development and transfer. However, in the absence of fundamental changes to governmental funding structures, it seems likely that much of the required innovation will come from the private sector. Used well, intellectual property (IP) has the potential to incentivise innovation and enhance the commercial viability and dissemination of new technologies by providing greater certainty over returns on investment. As noted by Kathi Vidal, Director of the US Patent and Trade Mark Office, the patent system can be used to “power the new technologies aimed at the reduction of greenhouse gas emissions”. Her speech can be read here and our report here.

However, such views are arguably at odds with the stance that has been expressed by, among others, the UN Secretary General, who has called for the removal of obstacles to technological transfer, including specifically IP rights. Further, there is always scope for disputes arising in relation to IP rights.

So where does that leave us?

Is IP really a barrier to technology transfer?

To answer this question, much can be learnt from the pharmaceutical industry in terms of how to use IP rights to incentivise innovation while also facilitating the sharing of technology in the middle of a global emergency. At the onset of Covid-19, all the major manufacturers of Covid-19 vaccines voluntarily agreed to make their vaccines available to developing countries through a variety of mechanisms. These mechanisms involved, for example, licensing of patent rights to generic drug manufacturers, which also facilitated the transfer of the essential know-how required to make the vaccines.

The success of these mechanisms is perhaps reflected in the fact that, although the WTO introduced a Covid-19 Vaccine Patent Waiver, no country has to date declared an intent to make use of it.

This experience suggests that if IP rights exist that might prevent the transfer of technology to developing countries, those obstacles can be overcome through the conscientious decision of rights owners in relation to their IP rights. This experience also suggests that in the middle of a global emergency, the private sector does recognise the need and desirability of ensuring IP rights do not prevent the transfer of essential technology to all quarters of the globe and has shown itself willing to take steps to facilitate that knowledge sharing. It is also worth asking whether the innovation seen in response to Covid-19 which brought new vaccines to market in record time would have occurred had IP over such technology been abolished before the pandemic struck.

It is also possible that some countries may attempt to use compulsory licencing powers in the context of energy transition technologies. Depending on the circumstances this might amount to a de facto expropriation or a control on use of property within the meaning of human rights legislation and also as generally protected against in bilateral investment treaties depending on the jurisdictions involved.  This could, therefore, give rise to potential disputes.

Climate change carve-outs

Even if companies do enforce their IP rights, there are also policy questions around the extent to which the courts will allow IP holders to force infringers off the market when doing so would adversely affect the development of renewable energy projects in the middle of the climate crisis.

In 2022, in the US case of Siemens Gamesa v General Electric, Siemens successfully sued General Electric (GE) for infringement of a patent relating to the design of wind turbine rotor hubs. The Court had accepted GE should not be allowed to stay on the market given the impact it would have on Siemens, and therefore issued an injunction but, significantly, it was not a blanket one. Instead, GE was permitted to continue its work on the US’s first two commercial-scale offshore wind turbine projects in light of the fact that that “the world is currently facing a rapidly developing climate crisis”. The judge stated that, given the investment in and complexity of the offshore projects to date, GE should be permitted to continue work on them as “delaying largescale wind energy projects can impact efforts to combat [the climate crisis]”. The judge also considered the potential job losses if GE’s participation in these projects were to be halted.

Although Siemens was not able to obtain a blanket injunction, it was not left without a remedy and could seek financial redress from GE by way of a royalty of $60,000 per MW that applied to the GE projects carved-out from the injunction.

In the pharmaceutical sector we have seen claims brought by rights owners against competitors in which the rights owner has not sought injunctive relief, presumably because they recognised the desirability from a patient or public health perspective of the competitor product remaining on the market. In those cases, like Siemens, the rights owner has pursued a claim for financial compensation as a remedy for infringement of their rights.

Standards, standard essential patents and FRAND licensing

As new technologies are developed, we might also see the use of patent pools and standards to achieve interoperability and facilitate the development of commercially viable markets. Here, the telecoms industry provides a model for how IP might in fact be used constructively.

In the telecoms industry, standards ensure that devices from different manufacturers can work together seamlessly. To enable this in an industry home to some of the largest patent portfolios in the world, all patentees whose patents are essential to using the technology in a standard (ie, they are Standard Essential Patents or SEPs) must licence it on Fair Reasonable And Non-Discriminatory (FRAND) terms.

The use of standards has allowed significant advancement of technology with multiple competing commercial entities paying for access to the key patented technologies and integrating elements but it has also given rise to disputes. For example, what exactly FRAND terms are has proved controversial. Some potential infringers have tried to evade being sued by declaring themselves “willing licensees” when they have refused to take a licence from the patentees on the basis the terms being offered are not FRAND. This has frustrated SEPs patentees who have brought their disputes to the courts in different countries, which have dealt with multiple cases in the last few years concerning disputes over licensing terms (including the royalty rates to be paid) in relation to telecoms patents.

We anticipate that standards are likely to emerge in the implementation of some new clean energy technologies (perhaps autonomous vehicles) and that disputes are likely to follow.

Disputes arising from collaborations

IP has the ability to provide the foundation for successful collaborations and, given the complexity of the problems to be solved in the climate crisis, and the pace, breadth and scale of innovation required, collaboration will be essential. However, a side-effect of collaborations is the risk of disputes among various stakeholders and IP rights owners.

Again, we can look to the pharmaceutical sector. Here disputes have emerged over who owns the IP generated, the type and scope of IP licensed into a collaboration, whether a party has fulfilled its obligations to collaborate and innovate under the licence, and whether royalties are payable under a licence (and how much). We have seen, for example, a dispute over the ownership to a US patent covering a Covid-19 vaccine which was filed by Moderna, over which the National Institutes of Health is arguing its scientists should be named as co-inventors. This apparently arose because the collaboration agreements that governed the joint development of vaccines did not specify the ownership of IP which was generated from the collaboration. In another example, before the Covid-19 pandemic, Moderna was looking to licence mRNA delivery technology owned by Arbutus and Genevant but did not do so directly from the pair, instead sub-licencing it from a third party. Disputes subsequently arose regarding whether sub-licensing was allowed under the head licence, and whether the scope of Moderna’s activities fell within the sub-licence.

Disputes of this nature are not unique to the pharmaceutical sector and similar issues could readily arise out of collaborations in the clean energy space. However, there is also scope to reduce the risks of disputes by learning from the experiences of others. Identifying the background IP each party is contributing; anticipating the outcome of the collaboration and who will be entitled to do what with the resulting IP; having a coherent IP protection strategy; and setting up clear employment contracts for those participating in the project are all measures that can be taken to reduce risk.

Conclusion

IP underpins the energy transition and the new technologies needed to bring it about. The industry needs to give thought to potential challenges to IP in the sector and consider how it can best ensure that technology is widely disseminated. Innovators need to take care to consider IP and possible disputes relating to it as they develop and implement business strategies relating to the energy transition.

To follow the rest of this series on climate change disputes, please subscribe to our ESG blog here or click here to view on our website.

Key contacts

Rebekah Gay
Rebekah Gay
Partner, Sydney
+61 2 9225 5242
Emma Iles
Emma Iles
Partner, Melbourne
+61 3 9288 1625
Andrew Wells
Andrew Wells
Partner, London
+44 20 7466 2929
Rachel Montagnon
Rachel Montagnon
Professional Support Consultant, London
+44 20 7466 2217
Natasha Daniell
Natasha Daniell
Senior Associate, London
Julie Chiu
Julie Chiu
Senior Associate (Australia), London

Climate disputes – Parent company and supply chain risk

Growth of transnational tort claims means businesses risk liability for environmental failures by subsidiaries and counterparties

In recent decades, there has been a marked increase in the number of actions brought in the UK and elsewhere based on alleged environmental and human rights-based failings by large multinational corporations.

As these claims have developed in the English courts, the typical model is for groups of foreign claimants to allege a UK-domiciled company owes them a duty of care in relation to environmental or other impacts of the acts (or omissions) of another company in another country. For example, a foreign subsidiary, or even an unrelated business partner in the company’s supply chain.

These cases, often referred to as transnational tort claims, have risen in prominence in recent years for a number of reasons. Against the background of evolving views on the importance of ESG issues, transnational tort litigation is perceived to fill a gap where local laws or procedures leave no basis for redress or where lawyers cannot act on a no win, no fee basis to enable prospective claimants. Moreover, it may be attractive from a claimant perspective to pursue parent companies or large business partners with the deepest pockets.

Such factors have led claimant law firms and litigation funders to find creative avenues for claims, while local communities are becoming increasingly mobilised to seek redress. With the impacts of climate change becoming ever greater around the world, and in light of the resultant increase in corporate policymaking, climate-related impacts may become a focus for transnational tort claims in the future. While this is a developing area, there are significant hurdles facing any attempt to hold corporations liable for causing or contributing to climate change per se. It is, however, foreseeable that claims could be brought based on activities which allegedly exacerbate the effects of climate change in a particular area or for a particular community.

Parent company liability

It is well-established that each company in a corporate group has a separate legal personality, and a parent company is therefore not generally responsible for the acts or omissions of its subsidiaries. However, as a matter of tort law, the way a parent company operates and interacts with its subsidiaries can lead to it assuming a duty of care to third parties at risk of harm from the acts and omissions of those subsidiaries.

Recent cases where the English courts have considered such allegations against UK-domiciled parent companies at a preliminary stage include Vedanta Resources Plc v Lungowe and Okpabi v Royal Dutch Shell (outlined in our blog post here), both of which were appealed to the Supreme Court on the question of whether it was arguable that a duty of care was owed by a parent company. In Vedanta, some 1,800 Zambian villagers sought compensation from Vedanta Resources Plc, and its Zambian subsidiary, for alleged environmental damage from a copper mine in Zambia. In Shell, around 40,000 individuals from the Niger Delta region sought compensation from Royal Dutch Shell Plc and its Nigerian subsidiary for alleged environmental damage resulting from oil spills off the Nigerian coast. In both cases, the defendants challenged jurisdiction on the basis there was no arguable claim against the parent company as “anchor defendant” and therefore no basis for the court to allow service out of the jurisdiction on the subsidiary as a “necessary or proper party” to that claim.

In both Vedanta and Shell, the Supreme Court found it arguable that a duty of care was owed by the parent company defendants, emphasising that the question will inevitably turn on the facts of each case and the court should not conduct a “mini-trial” at the jurisdictional stage. A key issue will be the extent to which the parent company took over, or shared in, the management of the relevant activity. Relevant factors may include whether the parent company has provided defective advice or policies which were implemented by the subsidiary; promulgated group-wide safety or environmental policies and taken steps to ensure their implementation; or held out that they exercised a particular degree of supervision and control of the subsidiary. But this is not an exhaustive list.

Supply chain risk

Claims are also starting to emerge against companies in relation to the acts or omissions of unrelated entities in their supply chain, or those who have purchased corporate assets.

In Begum v Maran (UK) Ltda claim was brought against Maran, a UK-domiciled company, which had acted as agent for a related company in the sale of an oil tanker to a demolition cash buyer. Following the death of a worker dismantling the ship in Bangladesh after the sale, a claim was brought against Maran alleging a duty of care on the basis that it knew the vessel would be broken up in Bangladesh in highly dangerous working conditions.

On an appeal against a summary judgment and strike-out ruling, the Court of Appeal held the claim should be allowed to continue. Despite acknowledging it was an unusual basis of claim, the court found there was an arguable duty of care based on the assumed facts. It noted that claims based on a duty of care in respect of damage caused by a third party were “currently at the forefront of the development of the law of negligence” and described the alleged duty in Maran as being “on the edge of that development”. However, the court thought it would be inappropriate to strike out the claim in the circumstances.

It is not clear whether this case has progressed further, but it demonstrates the potential breadth of the bases on which transnational tort cases could be brought in future, the difficulty of striking them out at an early stage and the resulting risks for corporates.

Jurisdiction issues

Vedanta and Shell have shown it will generally be challenging for a UK-domiciled defendant to knock out a transnational tort claim at an early stage on the basis that there is no duty of care since the English courts approach this as a fact-specific question and will not conduct a “mini-trial”.

For cases brought before the end of the Brexit transition period (31 December 2020), the European regime for jurisdiction and the enforcement of judgments applied to the UK and accordingly the English courts were obliged to accept jurisdiction in claims against UK-domiciled defendants. They could not decline to hear the claim simply on the basis there was another available forum that was more appropriate. However, following Brexit, that regime no longer applies.

Therefore, a UK-domiciled company may be able to persuade the English courts to decline to exercise jurisdiction over a case which has little or no other connection to the UK. This is illustrated by the recent decision in Limbu v Dyson Ltd, where the High Court declined to exercise jurisdiction over a claim by migrant workers relating to alleged forced labour and exploitative conditions in a factory in Malaysia which manufactured products and components for Dyson branded products.

However, even if the English court has found that England is not the most appropriate forum, it will nevertheless refuse a stay if satisfied there is a real risk the claimant will not obtain justice in the foreign court. In Vedanta, for example, despite the claim’s connections to Zambia, the Supreme Court found there was a real risk of the denial of substantial justice if the claim was heard in Zambia, including because of its scale and complexity and the claimants’ inability to access litigation funding there.

Moreover, where the English court is prepared to stay the action in favour of a foreign court, this is likely to be on the basis of the UK-domiciled defendant’s willingness to submit to the jurisdiction of that court, which may bring risks depending on the jurisdiction in question. In the Dyson case, the UK defendants gave undertakings not only to submit to the jurisdiction of the Malaysian courts but also, for example: not to seek security for costs or an adverse costs order to the extent such costs would not be recoverable under the Qualified One-Way Cost Shifting regime in England; and not to challenge the lawfulness of any success fee arrangement between the claimants and their Malaysian lawyers.

Challenges for defendants

A number of aspects increase the risks and uncertainty for defendants facing these sorts of claims in the English courts.

First, there is limited guidance on how the English courts will approach these claims at trial, including on the question of what level of control or involvement is sufficient to establish a duty of care. To date, while we have Supreme Court guidance as to the circumstances where a duty of care arguably exists, in none of these transnational tort cases has the court had to finally determine whether a duty was owed to those affected by the acts or omissions of the relevant subsidiary, supplier or other third party. What is clear is the question is highly fact-specific, which makes the result difficult to predict in any particular case.

Second, despite these claims being heard in the English courts, the applicable law will usually be that of the foreign country where the alleged tort occurred. In many cases, that means the parties must obtain expert evidence as to the content of the relevant foreign law. This can increase costs and (although the English courts have extensive experience in applying foreign law) may ultimately lead to a more uncertain result than where the court is applying its own law.

Third, defendants may face significant challenges in recovering their costs in these cases where the claims fail. The claimants will often be individuals of few means, each is likely to be liable only for their individual share of the costs, and they may be supported by lawyers acting under a conditional fee or damages-based agreement who will not generally be liable for adverse costs if the claim fails. So, unless there is sufficient after-the-event insurance in place, or a third-party litigation funder is involved, defendants may be unable to recover the costs of a successful defence. Even then, where the claims have a personal injury element, Qualified One-Way Costs Shifting will often prevent a successful defendant from recovering costs in respect of those claims.

And all this is separate from the reputational damage these claims can cause, as well as the negative impact on relations with governments and local communities.

Managing the risks

Companies looking to mitigate the risks of these cases should carefully consider their policymaking process and implementation. Businesses should ask themselves whether their legal teams have sufficient oversight of the formulation of policies, particularly in relation to ESG issues, and whether there are established and effective governance processes for the adoption and implementation of group-wide policies.

It will also be important to consider carefully the language used in public statements, and in particular annual reporting. Considerable emphasis has been placed on these types of documents in the cases seen to date. Where appropriate, care should be taken to draft these documents in a way that reflects the corporate separation between parent and subsidiary.

When considering risk exposure to transnational torts, corporates should also remember to check how their insurance might respond to such scenarios. For example, does current insurance have adequate limits or sub-limits for defence costs? Or, in the event of a claim against them, does the corporate need to consider making a notification to its insurers?

The risks of claims arising due to failings in the supply chain or by those purchasing corporate assets can also be mitigated through prior consideration of risk, undertaking appropriate due diligence of suppliers and other business partners and (potentially) careful contract drafting. Maran signals that a company’s knowledge of the relevant risks of harm will be closely scrutinised in determining whether a duty of care has arisen. Where issues are identified with the practices of suppliers or other business partners, it will be crucial to take steps to address them, or (in an extreme case) to put an end to the relevant business arrangements.

To follow the rest of this series on climate change disputes, please subscribe to our ESG blog here or click here to view on our website.

Key contacts

Neil Blake
Neil Blake
Partner, London
+44 20 7466 2755
Maura McIntosh
Maura McIntosh
Professional Support Consultant, London
+44 20 7466 2608
Rebekah Dixon
Rebekah Dixon
Senior Associate (New Zealand), London
+44 20 7466 2958

Court of Appeal rejects second major attempt at a climate-related derivative action

In July 2023, the Court of Appeal upheld the first instance decision in McGaughey & Anor v Universities Superannuation Scheme Limited [2023] EWCA Civ 873 (“McGaughey“), dismissing the application by members of a pension scheme to bring a derivative action against the directors of the scheme’s trustee company.

McGaughey and ClientEarth v Shell, taken together, confirm that the courts of England and Wales remain wary of challenging reasonably made decisions of company directors. In McGaughey, the Court of Appeal also made clear that derivative actions are not appropriate when direct challenges are available. For more on ClientEarth v Shell, see our blog post here.

So, while derivative actions may continue to be brought as a disruptive tactic by activist shareholders, there is likewise continued judicial reluctance to second-guess corporate decision-making. The Courts are aware that climate risks are just one of the many risks which executives consider when deciding on strategy. In the absence of evidence of egregious disregard for climate risks, the courts seem unwilling to find that directors have the balance wrong.

Factual background to McGaughey

Two academics (the “Applicants“), members of the Universities Superannuation Scheme (the “Scheme“), one of the largest private occupational pension schemes in the UK, appealed the High Court’s rejection of their attempt to bring a derivative action against the directors of the Scheme’s trustee company.

The directors had approved resolutions amending Scheme benefits by making changes to salary threshold, accrual rate and inflationary increases and increased member contributions. They had also obtained an actuarial valuation as at 31 March 2020, when they were not required to do so until a year later. The Applicants challenged these decisions.

The Applicants also argued that the directors had breached their duties under the Companies Act 2006 by continuing to invest in fossil fuels despite the Scheme’s ambition to be carbon neutral by 2050. They argued the directors had not adequately considered the attendant financial risks. These breaches were therefore said to cause current and future loss to Scheme members, in the form of lost assets, increased deficit and other knock-on future losses.

As the trustee company of the Scheme is a company limited by guarantee, it has no shareholders. The statutory derivative action under the Companies Act 2006 was therefore not available and the Applicants consequently framed their claim at common law.

A common law derivative action must satisfy four requirements:

  1. sufficient interest or standing to pursue the claim on behalf of the company;
  2. a prima facie case that the claim falls within an exception to the rule in Foss v Harbottle;
  3. a prima facie case on the merits; and
  4. that it is appropriate in all the circumstances to permit the derivative claim(s).

The test for standing

The appeal in McGaughey failed at the first hurdle. The Court highlighted two key aspects to the Applicants’ lack of standing:

  1. Under the ‘Reflective Loss’ principle, the Applicants had to show they had suffered a loss. Also, importantly, they had to show this loss related to (or at least correlated with) the Scheme’s loss. The Applicants were unable to make out either of these. In particular, they could not prove any substantive loss suffered by the company on account of the directors’ actions (including in relation to fossil fuels claims).
  2. Further, because changes made by the directors to the Scheme benefits were not uniformly detrimental (ie the changes affected different classes of Scheme members differently), the Applicants were not able to bring the claim on behalf of all the members of the Scheme. Contrast this to the position of shareholders in a company, who all enjoy the same benefits.

Directors’ duties and other obligations

McGaughey makes clear that directors’ duties must be considered separately from their other obligations.

The rule in Foss v Harbottle is that, generally, the Company is the correct party to bring an action against its directors. There are, however, a number of exceptions to this rule, including where a fraud has been committed and the minority (ie shareholders) are prevented from remedying the fraud because the company is controlled by the wrongdoers (ie the directors).

The Applicants claimed that the directors knew or believed that the changes to Scheme benefits involved indirect discrimination and were nonetheless prepared to tolerate it for their own ends.

However, the Court of Appeal found this attempted to elide the directors’ statutory duties, owed to the company, with the objects of the trust. Mere allegations of directors acting in bad faith or having conflicts of interest are insufficient to fall under an exception. Claimants must specifically identify the fraud on minority stakeholders and the wrongfully obtained benefits of that fraud. The Applicants’ vague allegations were given short shrift, with Lady Justice Asplin commenting that “it was entirely inappropriate that the[se] allegations [of fraud] should have been made.”

Direct claims rather than derivative actions

Both the High Court and Court of Appeal showed a preference for direct claims over derivative claims. The derivative action mechanism is “not intended to enable would be claimants to avoid other procedural hurdles“.

The Court of Appeal noted that because of this, even if the Applicants had a prima facie case, the derivative action would not have been allowed to continue. In particular, the Court of Appeal noted it was “surprised” that the claim had been brought in this form, noting there was “no reason, save perhaps a desire to avoid the difficulties in relation to costs and representation,” for bringing it as a derivative action. Instead, the Applicants should have brought a claim which challenged the Scheme’s investment policy directly, here most simply in breach of trust.

The importance of internal governance to climate claims

While clearly a success for the Scheme’s directors, McGaughey also shows the importance of shareholder resolutions in corporate governance.

Leech J, deciding at first instance in McGaughey, considered a survey of members in finding that the directors had complied with their obligations to diversify and manage the Scheme’s assets.

Similarly, in deciding not to grant ClientEarth leave to pursue its derivative action, the High Court explicitly had regard to a shareholders’ vote of approval for Shell’s Energy Transition Strategy at previous Annual General Meetings.

Both the McGaughey and ClientEarth decisions highlight the courts’ consideration of these resolutions, signalling that proactive shareholder involvement can shape corporate climate strategy and that companies should consider their internal controls when assessing litigation risk.

Key contacts

Rachel Pinto
Rachel Pinto
Partner, London
+44 20 7466 2638
Rupert Swallow
Rupert Swallow
Associate, London
+44 20 7466 2157
Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2612
Rebecca Perlman
Rebecca Perlman
Partner, London
+44 20 7466 2075
Natalie Shippen
Natalie Shippen
Professional Support Lawyer, London
+44 20 7466 7623

London Climate Action Week – 26 June to 4 July 2021

We are proud to be a part of London Climate Action Week 2021 (LCAW), the annual event bringing together world-leading climate professionals and communities across London and beyond to find practical solutions to climate change.

Founded in 2019, LCAW is the largest independent climate change event in Europe, helping to shape our future into one that is net-zero, equitable and resilient. Rooted in London, our diverse, international city, LCAW uses its global perspective to spark climate action around the world.

We will be participating in sessions throughout the week which we hope you will be able to join us at:


How can corporates manage the climate transition

Monday, 28 June 2021, 4.00pm GMT

This event looks at the context in which corporates are responding the climate transition, how to develop strategy and seize opportunities and how to manage uncertainties in relation to climate disclosure and reporting.

Silke Goldberg and Lewis McDonald will be joined by Vanessa Havard-Williams and Rachel Barrett from Linklaters for this discussion.

REGISTER >


Climate Change Disputes: Public International Law – too hot to handle

Tuesday, 29 June 2021, 2.00pm GMT

The Paris Agreement signed by 195 countries in 2015 enshrines a commitment to limit the increase in global temperature to well below 2°C compared to pre-industrial levels, in order to avoid the worst effects of climate change. The upcoming COP26 summit will urgently address measures to be taken by States to meet this commitment in light of the continued rapid rise in global temperatures. But the scale of regulatory change and commitment required will test state policy-making and impact across business communities. This session will address the issue of climate change disputes from the perspective of public international law and specifically cover recent and potential climate change-related claims against states, including investor-State disputes, and the prospect of reform of investment treaties, such as the ECT, to accommodate climate change objectives.

Andrew Cannon will be joined by panellists from Jones Day, Clifford Chance, Twenty Essex and Queen Mary University of London.

REGISTER >


Key contacts

Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2612
Lewis McDonald
Lewis McDonald
Global Head of Energy, London
+44 20 7466 2257
Andrew Cannon
Andrew Cannon
Partner, London
+44 20 7466 2852