The cost of doing business: Dyson and global value chain liability

In a string of cases over the past few years (Vedanta Resources Plc v Lungowe [2019] UKSC 20 ("Vedanta"), HRH Okpabi v Royal Dutch Shell Plc [2021] UKSC 3 ("Okpabi"), Begum v Maran (UK) Limited [2021] EWCA Civ 326 ("Maran"), and Josiya & Ors v British American Tobacco Plc & Ors [2021] EWHC 1743 (QB) ("Josiya")) UK claimant law firms have attempted to test the boundaries of corporate liability in the ESG sphere, i.e. the extent to which a company can be held liable for the actions (or lack of action) of another. (Note: the concept of ESG risk is discussed in more detail below.)

In Vedanta and Okpabi the UK Supreme Court indicate that foreign-domiciled claimants have more flexibility when seeking to bring claims before the English courts against the UK-domiciled parent company of a multinational group in respect of alleged failings of its overseas subsidiaries. However the success of such claims is still far from straightforward due to complex procedural and logistical hurdles (see our recent article on Parent Company Liability hurdles and "class actions" for further commentary).

Maran and Josiya exemplify further novel attempts to broaden the scope of corporate liability: both cases involve allegations of human rights breaches in the value chains of the defendant, including the alleged use of child labour, breaches of the UK Modern Slavery Act, poor working conditions and unsafe working practices. In both cases, activities with heightened human rights / working practices risks were contractually outsourced to overseas third parties but, despite this, litigation in respect of those activities was brought against a UK-domiciled defendant rather than the third party.   Neither case has yet proceeded to full trial so the extent to which a company can be held liable for harms associated with the production of goods/provision of services which it has "outsourced" to third parties remains to be seen (in particular in circumstances where the company may have limited control over the health, safety and human rights practices of the third-parties to whom they have outsourced).  Businesses should, however, assume that whilst they are able to outsource the provision of certain of their services and functions, they may not be able to entirely outsource the litigation risk associated with the provision of those services and functions.

A group of claimants has threatened legal action against global manufacturer Dyson for its alleged responsibility for the actions of a Malaysian-domiciled third party with which it had contracted to produce parts for its vacuum cleaners. In short, it was alleged that (i) the third-party contractor, ATA Limited ("ATA"), had engaged in forced labour practices, (ii) Dyson owed a duty of care to the victims of the alleged forced labour practices, (iii) Dyson failed to protect the victims, and (iv) Dyson financially benefitted from the practices. The threatened legal action, made public earlier this year, was accompanied by a well-publicised documentary broadcast in the UK on Channel 4, which received significant attention on social media.

Following the publicity associated with the documentary and the threatened legal action, representatives of Dyson confirmed that it had previously been made aware of allegations regarding ATA. As was confirmed by a Dyson spokesperson at the time, two internal and four external audits were performed on ATA between 2019 and 2021. However, in September 2021, a whistle-blower made allegations regarding "unacceptable actions" by staff of ATA, following which Dyson launched further external investigations into the allegations.

Though the findings are not publicly available, it was reported that the final independent investigation uncovered substantial issues relating to forced labour. In November 2021, after receiving the results of the final audit, Dyson announced that it was terminating its commercial relationship with ATA with six months' contractual notice.  This, however, was not enough to prevent the group of claimants from threatening to issue a value chain liability claim in the High Court in London. We understand that, as at the date of this article, the proceedings remain at the pre-action stage.

The case raises important questions about the value of social audits in uncovering human rights abuses and other forms of corporate misfeasance. Social audits and related certification schemes are often seen as one of the main methods of conducting human rights and health and safety due diligence on a company's value chains. However, the Business and Human Rights Resource Centre's 2021 Social Audit Report argues that such measures have systematically failed to improve labour conditions and could, in the worst cases, perpetuate human rights abuses (see our related article on Social Auditor Accountability – Proposals for Reform for further commentary).

This case also highlights the need for companies with complex supply chains and international operations to be prepared to address allegations of impropriety and misconduct in their value chains (both legally and reputationally).

At the same time as these litigation developments, regulatory controls around value chain due diligence are also continuing to develop around the world and can be seen as a way of addressing the inherent difficulties in holding companies to account through the common law. For example, the proposed Corporate Sustainability Due Diligence ("CSDD") framework in Europe (a type of mHRDD regime), seeks to 'increase corporate accountability for adverse impacts' and 'improve access to remedies for those affected by adverse human rights and environmental impacts of corporate behaviour' by subjecting larger companies and those operating in high-risk sectors to enhanced regulatory scrutiny. The CSDD will apply to certain companies domiciled in the EU, as well as certain companies domiciled outside of the EU, but with operations within the EU. Where companies operate in these sectors and meet certain thresholds as to their annual turnover and number of employees, they would be required to introduce and implement human rights and environmental due diligence measures.  

The CSDD would require companies not only to implement these measures in respect of their own corporate structures, but also in relation to value chain operations with which they have "established business relationships"[1], irrespective of the jurisdiction within which those entities operate. Importantly, the CSDD would impose a duty on directors to take into account the consequences of their decisions on human rights, climate change and the environment, with a failure to consider such sustainability measures potentially having an impact on director remuneration.

The CSDD would also introduce a civil liability regime to allow victims to bring claims against organisations for damages due to harm which could have been avoided by proper due diligence measures. (For further information on the CSDD, please refer to our related article: Corporate Sustainability Due Diligence: a long-awaited proposal revealed.)

[1] "Established business relationship" is defined under the CSDD as a “direct or indirect” business relationship which is or is "expected to be lasting, in view of its intensity or duration and which does not represent a negligible or merely ancillary part of the value chain". The nature of this relationship is to be reassessed at least once per year.

Monitoring and protecting against ESG risk in your value chain

As companies continue to come under increasing scrutiny regarding their governance standards and ESG commitments in a changing regulatory landscape, the scope of, and their exposure to, ESG risk can seem uncertain. As this area of law evolves, the following are several key practical factors to consider:

Define your role: At the core of value chain liability cases is the nature of the relationship that a company has with its suppliers. Key questions to consider are the extent to which the company supervises/audits its suppliers, assumes responsibility for the governance of its suppliers (i.e. through shared policies or otherwise), and how the relationships with its suppliers are defined (i.e. contractually or otherwise).

Consider your messaging: As companies come under increasing ESG-related scrutiny, many have sought to revamp (or introduce) ESG policies and frameworks, which can often involve the release of public-facing statements regarding their environmental and governance policies (including statements as to a company's relationship with its suppliers).

Indeed, certain domestic legislation such as the UK's Modern Slavery Act specifically requires qualifying organisations to publicly set out the steps they have taken to eradicate slavery and human trafficking within their business and supply chains. These statements may subsequently be relied upon by investors and  customers, as well as the victims of alleged corporate wrongdoing across an organisation's international supply chains. It is therefore important for a company to get its messaging right, and to consider whether what it has written down accurately reflects the nature of its relationship with its suppliers, as well as the scope of its ESG commitments. 

Evaluate your relationships: In industries where there are ESG audits (such as social audits), and therefore there are instances of non-compliance, the question of when to try to remedy an issue identified in the course of an audit is a complex one. Rather than make a rushed decision, a company should work with its advisors at the outset to develop a holistic and informed crisis management plan.

Thanks to paralegal Jacob Miller for his assistance with this article.