Mapping the social audit trail: what the Tesco and LBMA claims tell us about the direction of ESG litigation in the UK

Businesses with overseas operations, and firms that provide social audit support services to those businesses, need to be cognisant of attempts by claimant law firms to extend the existing boundaries of tort law and bring novel and ambitious value chain liability claims against them. Several claimant law firms (and litigation funders) have explicitly pivoted towards bringing these claims in the ESG space. To date, these claims are founded on two nascent extensions of the tort of negligence, namely (i) parent company liability and (ii) value chain liability (see Figure 1), which have typically been deployed in cases against high-profile and/or publicly listed companies. However, we are now seeing a wider range of defendants facing these types of claims.

This briefing explores the recent claims issued or launched against Tesco and the London Bullion Market Association ("LBMA") within these developing frameworks and assesses potential impact on UK businesses. In our view, the broadening reach of these types of claims is a development that UK businesses must treat seriously as they contemplate the ESG risks they face.

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What is parent company and value chain liability?

Parent company liability

In two recent decisions of the UK Supreme Court (Vedanta and Okpabi, two environmental damage claims), the Court held that a parent company could be liable for the negligent acts of a subsidiary in circumstances where a parent (i) "availed itself of the opportunity to take over, intervene in, control, supervise or advise the management of the relevant operations … of the subsidiary" or (ii) in published materials "holds itself out as exercising that degree of supervision and control of its subsidiaries, even if it does not in fact do so". The Supreme Court noted that in corporate groups, parent companies (or business units within a corporate group) could take de facto control of a subsidiary (or a particular business function of a subsidiary) and therefore considered that a parent company could be sued by claimants on the grounds that it (i) stood in place of the subsidiary in practice and (ii) therefore assumed a duty of care that the subsidiary would otherwise hold. No parent company liability claim has reached trial, however, so there is some uncertainty as to whether a court would actually find that this level of control existed in practice.

A detailed summary of the case law surrounding parent company liability can be found in the DR Yearbook 2021.

Value chain liability

Value chain liability claims are an even more ambitious attempt to extend the tort of negligence. A "value chain" is a reference to a company's activities related to the production of goods/provision of services. This can be a very wide brief and can include the development of the product or the service, and the use and disposal of the product. It also includes the related activities of established upstream and downstream business relationships.

In England, claimants in cases such as Maran and Josiya have brought negligence claims against UK-domiciled defendants in circumstances where the harm was allegedly (i) suffered downstream from the defendant's value chain and (ii) conducted by a third-party totally unconnected with the UK-domiciled defendant. In both instances, the claimants successfully resisted attempts to strike out the claims on the grounds that the duty of care was too remote. No claim has reached trial, and so the parameters of this type of claim remain uncertain.

For a detailed summary of the status of the law in this area, please refer our briefing on the Maran claim.

The Tesco claim: can contracting with auditors extend a retailer's litigation risk?

A claim has been issued against Tesco and an associated third-party social auditor relating to alleged forced labour practices at a garment factory in Thailand. The legal claim asserts that the claimant factory workers worked in inhumane conditions while making clothing for a Thai subsidiary of Tesco.

Tesco, and the auditor, are said to have conducted audits at the factory, but failed to identify the alleged unlawful activities set out in the claim. The claimants contend that Tesco was aware of the origin of the clothing and was also aware, or ought reasonably to have been aware, of the unlawful housing conditions and factory working conditions and practices.

Tesco have responded saying that (i) no arguable claims have been brought, (ii) it does not accept the claim should be brought in England, and (iii) under Thai law Tesco owed no duty to the claimants. The social auditor has similarly denied all liability.[1]

What is the role of a social auditor?

A social auditor is an independent body engaged by a business to measure, understand and report on the ways in which that business is meeting (or falling short of) its environmental, social and governance objectives, as assessed against (i) relevant legal and regulatory requirements, (ii) the business's internal policies and procedures and /or (iii) any accreditation standards the organisation holds. The audit will provide an assessment of the business's performance against its ESG objectives and may also suggest ways in which an organisation can strengthen its commitment to ESG-related goals in order to narrow the gap between aspiration and actuality.

This is the first time a social auditor has been subject to a value chain liability claim.[2] The claim raises questions as to how the courts will consider the relationship between UK-domiciled companies and other third parties in their value chain, including their contracts with social auditors, when assessing duties of care owed to claimants.

The LBMA claim: the accreditation nexus and actions against trade bodies

The LBMA, an independent authority promoting the advancement of standards in leadership, integrity and transparency for the global precious metals industry, is facing the prospect of a claim relating to the deaths of two miners working at the North Mara Gold Mine, Tanzania between July and December 2019. The miners were shot and killed by armed security forces, including private security and police offices, allegedly working for and/or on behalf of the mine at the time.

The LBMA has no direct involvement in the running of the mine, nor in refining the gold produced there, nor certifying that the gold extracted from the mine meets its standards. However, the claimants say that the LBMA bears responsibility for the harm suffered by the two miners because of its role as a social auditor for an Indian company that subsequently refined the gold produced by the mine. They allege that the LBMA owed a duty of care to the miners to ensure they were not subjected to human rights abuses, which they breached by certifying the Indian refiner as a "Good Delivery" refiner. In particular, LBMA "Good Delivery" certification requires refiners to adopt policies to address the risk of handling gold from sources contributing to human rights abuses, conflict, crime or environmental damage in their primary gold supply chains.

The LBMA has said in comments to the media that it believes the case has no merit because its rules were clear and had been followed. The owner of the mine, Barrick Gold, is also facing separate (long-running) claims relating to alleged human rights abuses by security forces at North Mara in both the UK and Canada, which may also be considered by the courts when assessing whether the LBMA claim is arguable.

The prospect of the claim breaks new ground in proposing the expansion of the duty of care nexus throughout the value chain, including to trade bodies offering "ESG-type" accreditation for producers. How the courts will consider applying the traditional tortious principles of foreseeability and remoteness to cases such as this one is yet to be seen, but the activism shown by claimants in asserting these causes of action should certainly prompt both providers of accreditation and accredited bodies to consider the nature of their value chain and the operation of ESG-related policies and procedures within it.

Key developments for retailers, trade bodies and social auditors to consider

When faced with a similar question in a claim following the tragic collapse of the Rana Plaza factory in Bangladesh, the Canadian courts considered that neither the parent company nor its contracted social auditor owed a duty of care to the victims of the collapse. However, the ever-growing focus on ESG, including by regulators, may lead the UK courts to draw different conclusions, depending on the individual fact patterns of the case.

The Tesco and LBMA claims should sound a note of caution not only to businesses that use social auditors, but also (i) social auditors, (ii) consultants who offer social auditing services and (iii) industry bodies that produce ESG-type standards and accreditations. Increased scrutiny on these auditing firms and industry bodies may also change the nature of the ESG accreditations available to businesses. The extension of accountability proposed by the claimants in the LBMA and Tesco actions arguably encourages audit firms to reduce the scope of the standards they offer or cease to offer them entirely.

We have also seen regulators become more active in the ESG sphere, with greater interest in holding businesses to account for the statements they make, in advertising[3] and when targeting investment (for further detail, see our briefing on recent FCA activity). The intervention of regulators in this space may therefore become of paramount importance to protect the existence and promulgation of ESG industry standards, which do play a key role in making businesses accountable for any ESG-related claims made.

Above all, businesses should continue to manage ESG-related risk through sustainable and robust internal ESG governance, compliance and monitoring systems. The nature of these policies will differ across industries and sectors, but businesses should be aware of how they implement and assess their ESG objectives in order to take a holistic approach to managing ESG risk.

Footnotes