In the recent hyperbole surrounding the failure to bring to justice the persons responsible for the Bhopal gas tragedy, scant attention has been paid to the legal requirements to convict corporate executives of criminal conduct. On June 7 of this year, the Magistrate Court in Bhopal imposed suspended sentences of two years jail time and modest monetary penalties to eight former directors of Union Carbide India Limited (“UCIL”). Given the enormity of the tragedy, the sentences were met with widespread national outrage. The court did not rule on the liability of Warren Anderson, the chairman of Union Carbide Corporation (“UCC”) at the time of the incident, and the focal point of public outrage in India. Absent from the discourse is any discussion of the legal doctrines that underlie corporate and individual culpability for the tragic events of that December night twenty six years ago. An appreciation of this is essential for meaningful discussion of the legal reform required to prevent what is perhaps the real tragedy- the failure to adequately compensate the poor and powerless victims of the Bhopal incident.

First, to put things in context, some facts which are not in dispute. The Bhopal plant was owned by UCIL, an Indian company, publicly listed on the Calcutta Stock Exchange. Its shares were held 50.9% by UCC, a New York corporation, another 22% was held by Indian public financial institutions, and the rest by roughly 23,000 small shareholders. At the time of the Bhopal incident, UCIL was celebrating its 50^th anniversary in India. Following the incident, the Government of India (“GOI”) enacted the Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985, appointing itself as the sole representative of the people injured by the gas leak. Two days after the incident Warren Anderson accepted moral responsibility for the Bhopal incident. But the question of his and UCC’s legal (civil and criminal) liability was left open, and to this day has yet to be established by a court of law.

Bringing Warren Anderson and UCC “to justice” requires an examination of substantive legal doctrines, as well as the requirements of due process of law. Substantive law makes clear that:

• Officers and directors of a corporation may be held criminally liable for offenses by the corporation only in very narrow circumstance, and that any criminal action against Warren Anderson, a U.S. citizen, must be in accordance with international law, including the US India Treaty on Mutual Legal Assistance in Criminal Matters;

• As separate legal entities, UCC may not be held liable for UCIL’s malfeasance unless the court “pierces the corporate veil” or adopts some other theory of enterprise liability to make UCC liable.

In addition, in any future man-made mass disaster it will be essential that the courts and investigative agencies in India function in an expeditious and thorough manner, so that there is no doubt that justice will be served. Doubts had previously been expressed including by none other than the GOI itself, regarding adequacy of the court system in India.

Imposing Criminal Liability on Directors is Not Straightforward

In much of the popular discourse, the criminal liability of Warren Anderson, chairman of UCC at the time of the Bhopal incident, has been taken as a given. Scant attention has been paid to the legal requirements for imposing such liability.

Officers and directors, such as Warren Anderson, are liable for the criminal offenses of a company in very narrow circumstances; certainly not as a matter of course. Their liability rests on the principles of vicarious liability, which itself is based on principles of agency law or imposed by statute. In India, to support a finding of vicarious liability in a criminal matter, there must be a provision in the underlying statute fixing liability on the directors. In the absence of such a provision, criminal liability can be imposed on a director only if he aided and abetted the violation by the corporation through specific conduct or if it is proved that he at the time of the violation was “in charge of” and responsible to the corporation for the conduct of its business. The Supreme Court of India has interpreted these words to require that the accused be in overall control of the day to day business of the entity. This requirement is not met merely by the accused having a right to participate in the business of the entity.

Accordingly, the criminal liability of Warren Anderson as a director of UCC will be founded on painstakingly making a case that he is vicariously liable and proving that he engaged in conduct that establishes beyond a reasonable doubt his culpability for the acts and omissions of that fateful night. This is a monumental prosecutorial challenge.

UCC’s (Parent Company) Liability Cannot Be Taken for Granted

In holding UCC liable, one basic question is whether and to what extent the separate existence of UCIL should be ignored. The separate existence of a corporation is a fundamental assumption that underlies global commercial transactions, and there must be compelling reasons for a court to ignore that assumption. Generally the existence of a corporation is sought to be disregarded when it has no assets. UCIL was a “going concern” with substantial assets, and there is nothing to suggest that it was undercapitalized.

Piercing the Corporate Veil of UCIL

Generally corporate veil piercing is appropriate only when recognition of the separate corporate existence will lead to injustice or an unfair or inequitable result. This is a necessary but not a sufficient condition for imposing liability on shareholders, such as UCC in this case. While piercing is rare, two factors in the present case favor it: (a) liability is sought to be imposed on another corporate entity rather than an individual; and (b) liability arises in the first instance from tort rather than contract.

Many cases in which shareholder liability has been found concern shareholders that are themselves corporations, as is the case here. Often in such cases a parent corporation is being held liable for the debts of the subsidiary. These cases have a somewhat different flavor than cases in which the shareholder defendant is an individual, and there is a general feeling that disregarding the separate corporate existence of the subsidiary may be easier where another corporate entity is held liable.

Beyond that, the general standards applied in determining whether the shareholders (or parent company) of a corporation should be held liable are quite different in contract cases as compared to tort cases. In a contract case, the third party has usually dealt in some way with the subsidiary and is aware that it lacks substance. In a tort case, on the other hand, there is no element of voluntary dealing. The question in these cases is whether it is reasonable for owners of a business to transfer a risk of loss or injury to members of the general public through the device of a corporation which has limited assets.

Generally corporate shareholders, such as UCC, have been held liable for subsidiary obligations in a number of situations:

1. When the subsidiary is being operated in an “unfair manner,” e.g., the terms of transactions between parent and subsidiary are set so that profits accumulate in the parent and losses in the subsidiary;

1. When the subsidiary is consistently represented as being a part of the parent, e.g., as a “division” or “local office” rather than as a subsidiary;

1. When the separate corporate formalities of the subsidiary are not followed;

1. When the subsidiary and parent are operating essentially as parts of the same integrated business, and the subsidiary is undercapitalized; and

1. When there is no consistent clear delineation of which transactions are the parent’s and which are the subsidiary’s.

Enterprise Liability

Besides the doctrine of piercing the veil, the enterprise theory of liability, although not widely accepted, could be a basis for imposing liability on UCC. Enterprise theory views the corporate group as a singular unit, rather than viewing each subsidiary or affiliated corporation as a separate legal entity. Since subsidiaries (especially wholly-owned subsidiaries) at least theoretically act for the benefit of the corporation as a whole, enterprise theory follows the profit and holds the various corporate actors in a given web accountable for the actions of other actors. Enterprise principles thus apply liability according to the patterns of the economic enterprise instead of stopping at the contours of the legal fiction. Adopting this theory would allow claimants of UCIL, one actor in a corporate group, to recover from UCC, another member of the group under ordinary tort circumstances. However, because the Indian courts have not opined on the enterprise theory of liability, this will be new ground.

Absence of Mass Tort Legislation

India has no mass tort legislation that broadens the responsibility for compensation and remediation of harm caused by hazardous activities that may affect the general public and establishes a mechanism to compensate the injured. For example, there is no legislation in India such as the US Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) under which a parent corporation might be liable as an “operator” of the site if it was involved in the operation of the site itself. In the absence of specific legislation, a court will have to rely on common law doctrines to disregard the existence of UCIL (pierce the corporate veil) and hold UCC liable. There is also the separate question of law as to what extent Dow Chemicals, as successor to UCC, could be liable.

Adequacy of Legal Infrastructure in India

It is often said that perception is reality. This is all the more true in this case, where the functioning of the Indian legal system will be critically examined internationally. To be credible, judicial proceedings and criminal investigations in this matter will not only have to meet the highest standards of law, but should also be so perceived by all observers. The GOI itself had serious misgivings on this account at the time of the Bhopal incident. In 1986, the Union of India acting on behalf of the victims of the Bhopal incident is reported to have argued before the federal district court in New York that “the courts of India are not up to the task of conducting the Bhopal litigation . . ., “that the Indian judiciary has yet to reach full maturity due to the restraints placed upon it by British colonial rulers who shaped the Indian legal system to meet their own ends” . . . and “that the Indian justice system has not yet cast off the burden of colonialism to meet the emerging needs of a democratic people.” Dismissing the case on forum non conveniens grounds, federal district judge John F. Keenan wrote:

The Court thus finds itself faced with a paradox. In the Court’s view, to retain the litigation in this forum, as plaintiffs request, would be yet another example of imperialism, another situation in which an established sovereign inflicted its rules, its standards and values on a developing nation. This Court declines to play such a role. The Union of India is a world power in 1986, and its courts have the proven capacity to mete out fair and equal justice. To deprive the Indian judiciary of this opportunity to stand tall before the world and to pass judgment on behalf of its own people would be to revive a history of subservience and subjugation from which India has emerged. India and its people can and must vindicate their claims before the independent and legitimate judiciary created there since the Independence of 1947.

In re Union Carbide Corporation Gas Plant Disaster at Bhopal, India in December, 1984, 634 F. Supp. 842, 867 (S.D.N.Y. 1986). That was then. We do not know if the GOI still holds the same view. Leading members of the Indian bar, including senior advocate N.A. Palkhivala and J.B. Dadachanji, had disagreed and took a contrary view before the court.

Has history disproven Judge Keenan’s determination that the Indian courts are up to the task? We think not. To blame solely the Indian courts for the delay would assume that the parties involved, the GOI and UCC, moved expeditiously in litigating this case. As the parties and not the court alone set the legal “pace” of a trial in India, the saga of this twenty six year old case cannot be entirely attributed to the court alone.

Conclusion

            Justice requires that specific legal criteria be satisfied for the imposition of criminal liability upon the officers and directors of UCC. To impose criminal liability without evaluating whether the facts of Bhopal fall into the limited circumstances under which criminal liability may be imposed would itself be a denial of justice. To prevent what happened in the aftermath of the Bhopal incident, we as lawyers must press the government to pass comprehensive legislation providing for proper compensation to victims of mass torts and for criminal liability if the circumstances allow. The disaster of Bhopal “gnaws at the conscience” of the Indian people according to Prime Minister Manmohan Singh and represents a true human tragedy. There are many legal lessons to be learned in the wake of the Bhopal tragedy. Perhaps the most important is that the law and courts must be better equipped to address any future Bhopal-like mass tragedy.

Anand S. Dayal is a partner with Koura & Company, Advocates and Barrister, based in New Delhi, India. Anand received his J.D. cum laude (1992) from Cornell Law School, and is admitted to the bar both in India and the US (NY and DC). He was previously Of Counsel with White & Case and an associate with Chadbourne & Parke and Pillsbury Madison & Sutro. Anand is chairman of the Anti-Corruption Committee of the American Chamber of Commerce in India. He can be contacted at dayala@vsnl.com or adayal@kouraco.com.

Jonathan Wolff is a second year law student at Washington University in Saint Louis and is currently interning for Koura & Co. His research interests include international corporate law as well as international and United States water law. He can be contacted at jswolff@wulaw.wustl.edu.

 

 

by Anand S. Dayal and Jonathan Wolff