Lessons from New Zealand - landmark judgment opens door for climate change litigation

On 7 February 2024, the Supreme Court of New Zealand released its much-anticipated judgment on Smith v Fonterra & Ors. The judgment, which concerned an appeal against strike-out, permits the novel climate change claim brought against several of New Zealand’s largest corporations, to proceed to trial. Whilst the substance of the claim remains to be determined conclusively, the Supreme Court’s judgment creates a potential pathway for the development of climate related tort-based common law actions.  It will be of interest to corporates and financial institutions tracking how litigants are increasingly prepared to use innovative and novel legal claims to seek to hold corporate entities to account in relation to their emissions targets and response to climate change more broadly.

Background 

Summary of claim 

The claim is brought by Mr Smith, an elder of Ngāpuhi and Ngāti Kahu and the climate change spokesperson for the Iwi Chairs Forum, against seven corporate entities in New Zealand. The seven companies are either directly involved in industries emitting greenhouse gases or manufacture and supply products which release greenhouse gas. In essence, Mr Smith alleges that the defendants have all materially contributed to climate change and caused damage, and will continue to damage, the environment, including places of cultural, historical, and spiritual significance.

Mr Smith has brought claims in public nuisance, negligence, and a breach of a proposed new "climate system damage" duty to cease contributing to damage to the climate system. By way of relief, Mr Smith seeks: (i) a declaration from the court that the defendants' emission-related activities are unlawful and (ii) an injunction requiring that the defendants should either ensure that their net greenhouse gas emissions peak by 2025 and secure linear reductions to net zero emissions by 2050 according to a prescribed formula, or an immediate halt to net greenhouse gas emissions.

Procedural history

In an early strike-out application in March 2020, the High Court of New Zealand dismissed Mr Smith's claims of public nuisance and negligence but declined to strike out his proposed new “climate change damage duty”. Mr Smith appealed and the defendants cross-appealed.  In October 2021, the New Zealand Court of Appeal struck out all three claims, finding that “the magnitude of the crisis which is climate change simply cannot be appropriately or adequately addressed by common law tort claims pursued through the courts” and that the response to climate change demanded “a sophisticated regulatory response” from national and international governing bodies. Mr Smith appealed to the Supreme Court which heard the appeal in August 2022.

The Supreme Court’s Decision 

The Supreme Court unanimously overturned the Court of Appeal's decision, finding that all three of Mr Smith’s claims should be reinstated and allowed to proceed to trial.  In summary:

1. The Court found that a measured approach to strike out is appropriate where a claim is novel but is founded on seriously arguable non-trivial harm. Namely, the Court must be satisfied that the claim was bound to fail and should lean towards receipt of the claim over pre-emptive elimination. 
2.  The Court rejected the argument that climate-change related claims in tort are excluded by statute, finding that existing legislation left room for the common law to operate, develop and evolve as necessary.
3. The Court did not consider that the legal threshold for a strike-out had been met. Focussing on Mr Smith’s public nuisance claim, the Court concluded that Mr Smith had tenably pleaded interference with an actionable public right (e.g. public rights to health, safety, comfort, convenience). The Court also did not accept that apparent difficulties in directly attributing the harm claimed by Mr Smith to the emissions of the defendants was fatal to the continuation of the claim.
4. The Court did not assess the viability of Mr Smith’s negligence and the “climate change damage” tort, but permitted both claims to proceed on the basis that their continuation alongside the primary public nuisance claim would be unlikely to add materially to the cost, hearing time and judicial resources of the proceeding.
5. The Court recognised the role of tikanga (Māori customary practices and principles), finding that tikanga principles (including conceptions of loss that are neither physical nor economic) would be a question for the trial court to “grapple” with. 
6. While the Court acknowledged that there were “obstacles” to Mr Smith obtaining an injunction for the cessation of net greenhouse gas emissions, the Court recognised the utility of declaratory relief.

The case will now return to the High Court for case management through to trial.

Wider climate change litigation landscape

The Supreme Court’s decision in Smith v Fonterra comes against a backdrop of increasing exposure for corporates and financial institutions in respect of climate change litigation. In particular, recent years have shown that litigants are increasingly prepared to use innovative and novel legal claims to seek to hold corporate entities to account in relation to their emissions targets and response to climate change more broadly.

A notable example in the UK was the recent attempt by ClientEarth (an environmental NGO) to bring a derivative claim against Shell plc’s board of directors in its capacity as a minority shareholder. ClientEarth argued that the directors had breached their duties to promote the success of Shell for the benefit of its members as a whole (s172 Companies Act) and to exercise reasonable care, skill and diligence (s174 Companies Act) in relation to their management of Shell’s climate change risk. Similar to the novel “climate system damage” proposed by Mr Smith, ClientEarth also sought to establish a number of novel, “incidental” climate-related duties (such as a duty to make judgments relating to climate risk based on a reasonable consensus of scientific opinion), which ClientEarth argued necessarily arose when the board identified its climate strategy as a commercial objective and likely to promote the success of Shell.

In ClientEarth v Shell, the English High Court found that ClientEarth had failed to establish a ‘prima facie’ case required to continue its derivative claim for “a number of fundamental reasons”, including:

1. There is no universally accepted methodology as to how to achieve ‘net zero’ and English law respects the autonomy of directors to decide how best to achieve results that are in the best interests of the company’s members as a whole.
2. Shell’s directors were not subject to additional absolute ‘incidental’ duties, as they cut across the basic principle that it is for directors themselves to determine how best to fulfil their section 172 duty.
3. The Court could place very little weight on ClientEarth’s evidence, which largely consisted of the opinions of a ClientEarth senior lawyer and, in any event, failed to explain how Shell’s directors were said to have gone so wrong in their assessment of the many factors that should go into the board’s consideration of climate risk, amongst the many other risks to which Shell’s business was inevitably exposed.
4. The fact that ClientEarth held only 27 shares in Shell gave a clear inference that its real interest was not in how best to promote the success of Shell for the benefit of its members as a whole.
5. The mandatory orders sought by ClientEarth (including an order that the board should adopt and implement a strategy to manage climate risk in compliance with its duties) were imprecise and would require constant Court supervision.

Concluding thoughts 

The Supreme Court’s judgment in Smith v Fonterra represents one of the only instances within the common law framework where a court has acknowledged the potential for tort law to challenge the emissions of a private entity. In particular, the Supreme Court’s decision has challenged the prevailing orthodoxy that climate change cannot be appropriately or adequately addressed by common law tort claims pursued through the Courts.

Whilst the Supreme Court’s decision in Smith v Fonterra is not binding in England, it will no doubt be reviewed with interest by common law practitioners. Accordingly, whilst the English High Court in ClientEarth v Shell was reluctant to interfere in the decision making of Shell’s Board of Directors, the decision of New Zealand’s Supreme Court illustrates that claimants are continuing to take fresh approaches and whether they do the same in the UK, and elsewhere, remains to be seen.

Slaughter and May represented Shell plc and its Board of Directors in the ClientEarth v Shell  proceedings. Bell Gully acts for one of the defendants in the Smith v Fonterra & Ors proceeding.

Slaughter and May’s international strategy is based on close working relationships with market-leading independent law firms from across the world.  Given the global nature of ESG litigation, and ESG issues more generally, we work with firms such as Bell Gully in tracking international trends and providing ESG legal expertise rooted in a deep knowledge of local practice, procedures and culture.