Liability of parent companies and the actions of their subsidiaries

Liability of parent companies and the actions of their subsidiaries


Author: Paul Eccles

A long-awaited High Court appeal decision could have considerable implications for businesses.

A long-awaited High Court appeal decision could have considerable implications for businesses, especially concerning the long held belief that a parent company as a separate legal entity from its subsidiaries could not be held responsible for the subsidiaries' failings or liability.

The facts

In the case of David Chandler v Cape Plc (Court of Appeal 2012 EWCA CIV 525), Cape has lost its appeal against the decision awarding David Chandler £120,000 compensation for his asbestosis after he was exposed to asbestos at a subsidiary company, Cape Building Products Limited.

There was no doubt about the cause of Mr Chandler's asbestosis or that the subsidiary company had been negligent and in breach of its statutory duty in exposing Mr Chandler to asbestos.

However, Cape Building Products no longer existed, and there were no employers' liability policies in place to cover the claim. It was a wholly owned subsidiary of Cape Plc, so Mr Chandler pursued his claim against the parent company.

Decision at first instance

The High Court judge applied a three-stage test when deciding whether Cape Plc should be liable for the actions of its subsidiary:

  • Whether it was reasonably foreseeable to them as the Parent Company that Mr Chandler may suffer from an asbestos related illness.
  • How close was the proximity between Cape Plc and Mr Chandler? In essence, was the business of the parent and subsidiary the same, did the parent have any superior knowledge of some relevant aspect of health and safety, did the parent know or ought to have known that the subsidiary's system of work was unsafe?
  • Whether it was fair, just, and reasonable for the parent to owe a duty of care to an employee of its subsidiary company.

The judge at first instance determined that Cape Plc had actual knowledge of Mr Chandler's working conditions, and so the risk of his suffering asbestosis disease was foreseeable. Further, it had employed scientific and medical officers responsible for health and safety issues, including those of the subsidiary companies, to ensure they were not exposed to harm.

The appeal

Cape Plc argued on appeal that it should not be liable, as it did not have complete control of the subsidiary company. This principal argument was rejected.

In effect, it had extended its duty of care by the provision of the group-wide occupational health provisions. In other words, the appeal decision was founded on the basis of the common law concept of 'assumption of responsibility'.

While the Court of Appeal accepted that Cape 'was not responsible for the actual implementation of the health and safety measures at Cape Products', Cape had assumed a duty of care either to advise Cape Products on what steps it had to take and to ensure those steps were taken.

The Court of Appeal has made it clear now, that in appropriate circumstances the law may well impose on a parent company, responsibility for the health and safety of its subsidiary's employees.

Does this pierce the corporate veil?

The Court of Appeal 'emphatically rejects any suggestion that it is in any way concerned with what is usually referred to as piercing the corporate veil'.

The court further stated that '...a subsidiary and its company are separate entities. There is no imposition or assumption of responsibility by reason only that a company is the parent company of another company. The question is simply whether what the parent company did amounted to taking on a direct duty to the subsidiaries' employees.

The overriding message must be that if there is any degree to which a parent has some relevant or superior knowledge of health and safety in a particular industry, coupled with knowledge that a subsidiary's system of work is unsafe, and that it is foreseeable that the subsidiary or its employees would rely on the parent's superior knowledge, then it is not necessary to show that the parent is intervening in the running of the subsidiary.

Of course, on the facts of this case it is highly relevant that Cape had employed medical and other officers responsible for safety issues for itself and the subsidiary.

In essence, the corporate veil in these circumstances is pierced, but only on the basis of an existing concept of assumption of responsibility - Caparo Industries v Dickman 1990 - by its actions or knowledge. No doubt there will be cases which follow this and cases which are capable of being distinguished.

The insurance angle

Parent companies should review their existing claims portfolios with insurers to ensure that their employers' liability cover does in fact cover any potential liability.

Other potential danger zones to look for from an insurance angle are:

  • Is there sufficient cover in place?
  • Does the parent carry a large deductible?
  • Does the potential for such an argument in existing cases you have give rise to a 'circumstance', which might give rise to a claim triggering claims notification provisions in insurance policies? Indeed, is there an actual claim triggering notice provisions?
  • Does this raise any potential non-disclosure issues for the parent company when renewing policies pending resolution of the claim i.e. should the claim be disclosed?
  • What is the financial impact on premiums for your existing claims portfolios?

If in any doubt, do immediately discuss issues with your broker and insurers alike.

Final thought

It is correct that this is one of the first cases in which an employee has established, at trial, liability to him on the part of his employer's parent company in this type of employers' liability case.

However, until a similar case comes before the court, it is difficult to predict how the courts may interpret, apply or distinguish in the future.

The real area of focus is assumption of responsibility, the parent's knowledge both express or implied, as well as looking at whether the parent has intervened in the health and safety policies or other aspects of the subsidiary.