As the climate crisis intensifies, attempts to use law suits to garner attention and to hold governments and corporate polluters to account are increasing. Climate litigation often involves the creative or novel use of existing laws or mechanisms for legal redress. However, recent attempts to use existing company law procedure to mount climate claims in the UK have fallen flat.
Creative climate actions
In Montana in August, a number of young claimants successfully argued that the State’s continued approval of projects exploiting fossil fuels violated their constitutional right to a “clean and healthful environment” (Held et al -v- State of Montana et al, CDV-2020-307).
In a separate case to be heard by the Grand Chamber of the European Court of Human Rights, six young people in Portugal are seeking to hold 33 national governments (including all the EU states and the UK, amongst others) to account for damage caused by the wildfires which have ravaged Portugal in recent years (Agostinho & others -v- Portugal & others, app. no. 39371/20). That claim is based on alleged breaches of the European Convention on Human Rights, including the claimants’ right not to be discriminated against – on the basis that the climate crisis disproportionately affects the young.
However, two recent attempts in the UK to use claims under existing company legislation as a platform for climate litigation against company directors have been strongly rebuffed by the courts.
The derivative claim procedure under the Companies Act 2006 (“CA 2006”) allows shareholders in a company to bring a claim against that company’s directors on the company’s behalf for breach of duty, negligence, default or breach of trust. The loss concerned has to be suffered by the company itself.
ClientEarth acquired a very small shareholding in Shell, just 27 shares out of many millions. It then sought to bring a derivative claim against Shell’s directors, attempting to hold the directors personally responsible for Shell’s alleged failure to mitigate climate risk.
ClientEarth alleged that the directors had failed to put in place a sufficient strategy to meet Shell’s stated objective to become a net zero energy business by 2050 and to meet its obligations under an order of the Dutch court which requires Shell to cut its emissions.
In doing so, ClientEarth alleged that Shell’s directors had breached their statutory duties:
- To promote the success of Shell for the benefit of its members as whole, having regard to a set list of considerations, which include the impact of the company’s operations on the community and the environment (s. 172 CA 2006); and
- To exercise reasonable care, skill and diligence (s. 174 CA 2006).
The High Court refused ClientEarth permission to proceed with its claim on numerous grounds, first in May of this year on the papers and then in July following ClientEarth’s request for that initial decision to be reconsidered at an oral hearing. The main thrust of the court’s decision was that environmental concerns were only one of a range of competing factors which Shell’s directors had to weigh in the balance, and ClientEarth had not demonstrated that the directors’ actions were outside the range of reasonable responses open to the board of a business of Shell’s size and complexity.
One particular aspect of the court’s decision (which has not received much attention) illustrates the real difficulty in seeking to use a derivative claim as a vehicle for a strategic climate litigation. Under s. 263 CA 2006, in deciding whether to give a derivative claim permission to proceed, the court has to consider a number of discretionary factors, including whether the shareholder concerned is acting in good faith in seeking to continue the claim. Here, the fact that ClientEarth held only 27 shares in the company but was proposing that it should be entitled to seek relief on behalf of the entire company in a very large, complex and important claim was held to give rise to a clear inference that its real interest was not how to promote the success of Shell for the benefit of its members as a whole, but an ulterior motive.
The court’s ability to stop derivative claims which it holds are being pursued for ulterior purposes will make it extremely difficult to use the procedure for strategic climate claims.
The Court further penalised ClientEarth by ordering it to pay Shell’s ‘substantial’ costs of making submissions and attending the oral hearing – this is not the normal costs position on a failed derivative claim.
The Court of Appeal has also refused permission for a derivative claim brought by members of the United Superannuation Scheme Ltd (“USSL”) to proceed. USSL administers the superannuation scheme for academic staff in UK universities and other higher education institutions. A key plank in the claim was that, despite announcing that the scheme was to become carbon neutral by 2050, the directors of USS had failed to form an adequate plan to deal with the financial risks involved in direct and indirect investments in fossil fuels. This was said to in breach of the directors’ statutory and fiduciary duties, in that it would prejudice the interests and success of USSL.
The Court of Appeal disagreed. There was no prima facie case that the alleged breaches of duty had caused USSL any loss, and therefore the ‘fossil fuels’ claim fell at the first hurdle.
Strategic climate litigation appears set to increase. Bringing a claim against a recognised defendant can, of itself, be enough to win publicity and draw attention to the defendant’s actions. However, to ensure that the action has longevity, then it’s necessary to find a sound legal basis for the claim. In the UK, given the court’s discretion to refuse permission for derivative claims it perceives are being brought for an ulterior motive, coupled with the court’s willingness to penalise in costs those who it perceives are misusing the procedure, derivative claims appear a rocky foundation for such litigation.
In my view, the fact that ClientEarth is the holder of only 27 shares in Shell, but is nonetheless proposing that it should be entitled to seek relief on behalf of Shell in a claim which on any view is of very considerable size, complexity and importance (and will be exceptionally expensive and time-consuming to pursue), gives rise to a very clear inference that its real interest is not in how best to promote the success of Shell for the benefit of its members as a whole...This points strongly towards a conclusion that its motivation in bringing the claim is ulterior to the purpose for which a claim could properly be continued.