ClientEarth’s legal action against Shell made headlines when it was launched as it was the first English case to allege that directors could be in breach of their duties for failure to adopt a reasonable net zero strategy.
Commercial Litigation partner Elaina Bailes and trainee solicitor Francesca Bugg look at the High Court’s recent decision in ClientEarth v Shell and what the court’s refusal to let the claim proceed may mean for climate litigation in the UK.
Background to the claim
This case, as outlined in our previous article, was brought as a derivative claim. This is an English law mechanism that allows a shareholder to bring an action against a company in relation to the misconduct of its directors where a company suffers a loss (albeit technically speaking, the cause of action vests in the company itself). To deter spurious claims by aggrieved shareholders, section 261(2)(a) of Companies Act 2006 (“CA 2006”) requires the court to dismiss a derivative claim if it appears to the court that the application and supporting evidence do not create a prima facie case for providing permission.
ClientEarth, a non-profit environmental organisation, bought 27 shares in Shell Plc so that it could make such a claim.
On 12 May 2023, the High Court refused permission for Client Earth to continue its claim against the directors of Shell. The court determined that ClientEarth had failed to prove the limited and restricted circumstances in which it would be appropriate for the court to authorise the claim.
Alleged breach of directors’ duties
ClientEarth relied on two parts of the Companies Act 2006: sections 174 and 172. Section 172 requires directors to act in a manner that the directors consider in good faith would be most likely to promote the success of the company for the benefit of its members as a whole. In doing so, the directors should have regard (amongst other matters) to the likely consequences of any decision in the long term and the impact of the company’s operations on the community and environment. Section 174 requires a director to exercise reasonable care, skill and diligence.
The following three breaches of duty were pleaded:
- A failure to set an appropriate emissions target.
- A failure to adopt a strategy regarding the management of climate risk that would establish a reasonable basis for achieving net zero targets.
- A failure to comply with an order of the Dutch court in separate litigation concerning Shell in the Netherlands.
Additionally, ClientEarth highlighted six additional duties relating to directors’ duties to consider climate risk, including a duty to accord appropriate weight to climate risk and a duty to adopt strategies reasonably likely to meet Shell’s targets to mitigate climate risk. The claims were novel as it was the first time a claimant had attempted to link these general directors’ duties to climate risk strategy.
The court’s decision
The court did not grant ClientEarth permission to continue its claim. Although Mr Justice Trower understood some of the criticisms made by ClientEarth, he agreed with Shell that the arguments put forward were insufficient.
The judge concluded there were a multitude of reasons why ClientEarth did not establish a prima facie case, including:
- ClientEarth was unable to provide any expert evidence on which the court could rely in relation to climate science, carbon markets or other related areas. The judge found that ClientEarth’s lawyer, Mr Benson, could only speak to the law and policy relating to climate change.
- The management of Shell’s business was for the directors to determine, including how best to promote the success of the company.
- In complying with section 174 CA 2006, the law does not impose additional specific obligations as to what is and is not reasonable in every circumstance.
- ClientEarth’s case ignored the size and complexity of Shell and the fact that the directors of Shell will be required to consider a range of competing considerations that the court is ill-equipped to interfere with.
- ClientEarth had not made out a prima faciecase for the relief sought. The court was not convinced that the relief sought would be suitable for enforcement.
Additionally, Mr Justice Trower pointed out that it was part of ClientEarth’s case that the directors did, in fact, have policies and targets to achieve net zero by 2050 but that they were “manifestly unreasonable”. The judge highlighted this inconsistency with the suggestion that the Shell directors had not considered the best interests of Shell and its members as a whole when considering how to manage climate risk.
Mr Justice Trower was particularly critical of ClientEarth’s ulterior motive in bringing its claim. He believed the claim was driven by its beliefs as to the right approach for dealing with climate change, pointing strongly to a conclusion that the motivation in bringing the claim was at odds with the purpose for which a claim could properly be continued.
Future of climate litigation
From one point of view, this could be viewed simply as a case on the legal test for permission to pursue a derivative claim under English law that tells us nothing about wider climate litigation trends. The judge’s reasoning that it is not for the courts to interfere with the reasonable exercise of a board’s discretion in fulfilling its duties is a well-established principle.
However, the judgment’s significance lies in showing that creative attempts by climate activist organisations to use existing English company law as a hook to criticise companies’ environmental policies may be thwarted where the court strictly adheres to the legal principles. This is not surprising, given that the court’s role is to uphold the letter of the law.
There was no indication from the court that it might have sympathy with the claimant’s position, namely that in the absence of more specific environmental regulation of companies’ environmental activities, existing company law concepts are one of the only forms of legal redress. In fact, the court went the other way and was critical of ClientEarth’s attempt to use the courts to further its climate agenda. This is slightly surprising and contrasts with some judicial reactions to climate activist litigation in other jurisdictions.
This may have an impact on the future of ‘greenwashing claims’. There is currently no specific anti-greenwashing legalisation in the UK, so claimants must rely on common law misrepresentation. Would the courts take a similar dismissive approach to such claims?
The judgment also shows the courts do not have the appetite to allow claims requiring significant speculation regarding, for example, the impact of client science, climate risk mitigation or the methodology used to reach targeted reductions. However, as advancements are made in the scientific basis for businesses to move towards net zero, consensus may be reached on the quantification of these types of claims, therefore providing more certainty to the courts.
It is unsurprising that ClientEarth has filed its appeal for an oral hearing, given that climate litigation is still in its infancy and trending upwards. It is worth noting that the cumulative number of climate change-related litigation cases has doubled since 2015, with around one-quarter of cases filed since 2015 being filed in the last two years. The decision in this case claim may only be the beginning of the story.
The judgement can be found here.
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