ClientEarth v Shell PLC: a set-back for climate litigation?

ClientEarth received a significant setback when, on 19 May 2023, the High Court dismissed its application for permission to bring a derivative claim on behalf of Shell plc against the company’s directors. The “first of its kind” high profile climate-litigation could be over before it’s even begun. The NGO must now convince the court to reconsider its decision in an oral hearing, if it is to keep the claim alive.

In February 2023, ClientEarth brought a derivative action against Shell’s directors for “failing to manage the material and foreseeable risks posed to the company by climate change.” Reportedly supported by institutional investors, it sought an injunction requiring the Directors to adopt and implement a strategy to manage climate risk that complies with their statutory duties and comply with a previous order of the Hague District Court to cut emissions by 45 per cent by 2023.

The NGO argued that the directors breached their statutory duties to promote the success of the company and exercise reasonable care, skill and diligence (ss 172 and 174, Companies Act 2006). Specifically, by failing to adopt and implement an energy transition strategy that aligns with the Paris Agreement.

ClientEarth argued that six climate-related duties should be considered essential aspects of Shell's statutory duties. These duties encompass making informed judgments about climate risk based on a reasonable consensus of scientific opinion, assigning appropriate importance to climate risk, implementing reasonable measures to mitigate risks to Shell's future profitability and resilience within climate change agreements. It also included adopting strategies that have a reasonable likelihood of achieving Shell's climate mitigation targets and ensuring that the strategies for managing climate risk remain reasonably under the control of both present and future directors. Additionally, Shell is expected to take reasonable steps to comply with applicable legal obligations.

As a shareholder seeking to bring a derivative claim in the name of the company, ClientEarth was required to apply for permission to proceed with the action. However, the court ruled that ClientEarth failed to meet the initial threshold of establishing a prima facie case for granting permission, and so dismissed the application in accordance with s.261(2)(a) CA 2006.

The High Court’s dismissal 

In Mr Justice Trower’s judgment, ClientEarth failed to establish there was prima facie case for permission to continue the claim. In other words, the threshold to filter out “unmeritorious” or “clearly undeserving” claims was not met. It was found that it is not for the court to impose new duties on directors or to influence decision-making on commercial strategy. Indeed, Justice Trower was unconvinced by the six climate-related duties advocated by the NGO, agreeing with Shell’s submissions.

Not only were they “incapable” of enforcement and “incompatible” with the two statutory duties, they “cut across” the “well-established principle that it is for the directors themselves” to determine the weight given to the factors they must consider in discharging their duty to promote the success of the company [18].

In his view, the environmental impact of Shell’s operations must be regarded by the directors, but it has to be balanced against the other matters that directors are required to consider (s172 CA 2006).

It is for the directors, not the court, to determine Shell’s strategic response to the business risks associated with climate change; these are commercial decisions. By citing Lord Wilberforce in Howard Smith Ltd v Ampol Ltd [1974], Justice Trower firmly rooted his judgment within the well-established position of the court: “There is no appeal on merits from management decisions to courts of law: nor will courts of law assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at.”

In assessing whether the directors breached their duties, the court was not convinced that there was evidence of a universally accepted methodology Shell plc could follow to achieve the target reductions in its Energy Transition Strategy. Therefore, Justice Trower could not find that the approach taken by the directors fell outside the range of reasonable responses. 

It was also deemed that Shell’s directors are not under a duty to ensure compliance with the Dutch Order. In relation to the Dutch Order, the court held that there is no established English law duty (separate or distinct from the directors' general duties under the Companies Act 2006) which requires them to ensure compliance with the order of a foreign court.

Furthermore, it was ruled mandatory injunctions are not appropriate when frequent court supervision is required. The relief sought by ClientEarth – an injunction to implement climate risk strategy and comply with the Dutch Order – was “too imprecise to be suitable for enforcement” and would be likely to lead to disputes over compliance.  It is a well-established principle that the court will not grant a mandatory injunction if doing so would require constant supervision by the court. This is especially so if the relief sought is insufficiently precise. The court held that the mandatory orders requiring Shell's directors to implement a strategy to manage climate risk and comply with the Dutch Order that had been sought by ClientEarth "fall foul of that basic principle".

Finally, it was established that ClientEarth had not brought the case in good faith. Justice Trower was highly critical of the NGO’s motive when considering the discretionary factor that would have arisen in a substantive hearing (s.263(3)(a) CA 2006), stating: "Where the primary purpose of bringing the claim is an ulterior motive in the form of advancing ClientEarth’s own policy agenda with the consequence that, but for that purpose, the claim would not have been brought at all, it will not have been brought in good faith".

What’s next?

While ClientEarth has demonstrated that Shell faces material and foreseeable risks as a result of climate change, the NGO has failed to convince the court that Shell’s directors breached their duty in managing those risks.

It is recognised that the courts in England and Wales will only intervene in the running of a company if a decision is one that no reasonable director could have considered to be in the company's best interest. In short, the standard of conduct required of directors under s 172 is subjective, and the standard of review adopted by courts is rationality or plausibility. This is a high hurdle for would-be shareholder claimants to overcome; and so the Court’s decision in this case is not surprising.

The court's decision was taken on the basis of written submissions and ClientEarth has the option to request an oral hearing for the ruling to be reconsidered. However, with the judge seemingly imposing a high evidential threshold and finding the claim to be fundamentally flawed on a number of grounds, ClientEarth is likely to have an uphill battle to continue its claim. Regardless of the outcome, it’s clear the minority shareholder will not be deterred in its campaign and continues to galvanise investors in the wake of the recent high-profile AGM.

Katie Allard is an associate and Chloe Jacot is a trainee in the Dispute Resolution Practice at Kingsley Napley kingsleynapley.co.uk