In What Circumstances Are Parent Companies Liable for The Actions of Their Subsidiaries? A Revisitation of the Law

INTRODUCTION

In edition 48 of BC Disease News (here), we gave a brief overview of the legal principles underpinning a parent company’s legal accountability for a subsidiary's tortious acts.

We did so in reaction to the asbestos-related disease case of Thompson v Renwick Group Plc [2014] EWCA Civ 635, which followed the ‘landmark’ Court of Appeal case of Chandler v Cape [2012] EWCA Civ 525, albeit reaching the opposite conclusion on the facts, i.e. that the parent did not owe a direct duty of care to an employee of one of its subsidiaries to ensure a safe system of work.

This feature article provides an overview of the law preceding Chandler and Cape, while also delving into the case law since. What is the status quo?

THE COURT OF APPEAL RULING IN CHANDLER V CAPE

Chandler is revered for being ‘one of the first cases in which an employee … established at trial liability to him on the part of his employer's parent company’.

In summary, the claimant in this action was the former employee of asbestos manufacturer, Cape Building Products Ltd (Cape Products), from 1959 to 1962, during which time he was exposed to asbestos dust.

When the claimant was diagnosed with asbestosis, in 2007, the subsidiary no longer existed and all remaining employers’ liability insurance policies excluded asbestosis.

However, in light of the fact that Cape Products was a wholly owned subsidiary of Cape plc (the parent company), the claimant commenced a negligence claim, alleging that it had breached its duty of care to ensure his workplace was safe.

The simple question facing the appellate court, as emphasised at paragraph 70 of the judgment, was ‘whether what the parent company did amounted to taking on a direct duty to the subsidiary's employees’.

Having upheld the High Court’s decision that the parent company owed a direct duty of care, it was further clarified that this was not an ‘automatic duty’. At paragraph 80, Arden LJ explained that a parent’s duty be responsible for the health and safety of its subsidiary’s employees arose in ‘appropriate circumstances’:

‘Those circumstances include a situation where, as in the present case, (1) the businesses of the parent and subsidiary are in a relevant respect the same; (2) the parent has, or ought to have, superior knowledge on some relevant aspect of health and safety in the particular industry; (3) the subsidiary's system of work is unsafe as the parent company knew, or ought to have known; and (4) the parent knew or ought to have foreseen that the subsidiary or its employees would rely on its using that superior knowledge for the employees' protection. For the purposes of (4) it is not necessary to show that the parent is in the practice of intervening in the health and safety policies of the subsidiary. The court will look at the relationship between the companies more widely. The court may find that element (4) is established where the evidence shows that the parent has a practice of intervening in the trading operations of the subsidiary, for example production and funding issues’.

Practitioners, at the handing down of judgment, emphasised that point (4) has the effect of lowering the threshold for inter-company liability.[1]

It should also be stated that the Chandler case was interesting because it parenthetically engaged an unresolved issue in the area of company law – the ‘corporate veil’.

In Antonio Gramsci Shipping Corp v Stepanovs [2011] EWHC 333 (Comm) and Alliance Bank JSC v Aquanta Corporation & Ors [2011] EWHC 3281, the courts found that the ‘veil of incorporation’ (respecting the individual rights and liabilities of registered companies) should be pierced, in order for liability to fall on the owners of companies formed for the perpetuation of fraud, seeing that there was:

‘… no good reason of principle or jurisprudence why the victim cannot enforce the agreement against both the puppet company and the puppeteer who, all the time, was pulling the strings’.

Although the Court of Appeal, in Chandler, ‘emphatically rejected’ that the case had any impact on the concept of ‘piercing the corporate veil’, it is fair to say that the issues debated were relatable.

HOW THE LAW DEVELOPED UP UNTIL CHANDLER

Judgment in Chandler ultimately stemmed from the fact that a duty of care is based on an ‘assumption of responsibility’.

Turn back time to Lord Bridge’s 3-stage test for determining whether a duty of care exists, in Caparo Industries plc v Dickman [1990] UKHL 2, at page 618, and specifically note the impetus behind stages 2 and 3 and how this might translate to the relationship between a parent and its subsidiary.

  1. Damage should be ‘foreseeable’.
  2. There should exist between the party owing the duty and the party to whom it is owed a relationship characterised by the law as one of ‘proximity’ or ‘neighbourhood’; and
  3. The situation should be one in which the court considers it ‘fair, just and reasonable’ that the law should impose a duty of a given scope upon the one party for the benefit of the other.

Chandler follows an analogous line of authority on the ‘duty of a person to intervene to prevent damage to another’. Indeed, Lord Goff, at 270 of Smith v Littlewoods Ltd [1987] UKHL 18, stated that there is in general no duty to prevent third parties causing damage to another, except, for example, where there is ‘a relationship between the parties which gives rise to an imposition or assumption of responsibility’ on the part of the defendant. This ‘assumption’ need not be voluntary – authority for this can be found in Customs and Excise Commissioners v Barclays Bank [2006] UKHL 28.

Preceding the Court of Appeal’s decision in Chandler, there were several cases that had leaned towards the proposition that a parent company may owe a duty of care to the employees of its subsidiaries. We present the key findings from these cases, below:

  1. Connelly v Rio Tino Zinc Corporation [1997] UKHL 30:
    • ‘On a fair reading of this pleading, it seems to me that that is more or less what the amended statement of claim alleges — namely, that the first defendant had taken into its own hands the responsibility for devising an appropriate policy for health and safety to be operated at the Rossing mine, and that either the first defendant or one or other of its English subsidiaries implemented that policy and supervised the precautions necessary to ensure so far as was reasonably possible, the health and safety of the Rossing employees through the RTZ supervisors. Such an allegation, if true, seems to me to impose a duty of care upon those defendants who undertook those responsibilities, whatever contribution Rossing itself may have made towards the safety procedures in the mine’.
  2. Ngcobo v Thor Chemicals Holdings Ltd v others (January 1996, Unreported):
    • ‘… the fact that the law does not impose liabilities upon companies in respect of the acts or omissions of other companies in the same group simply by reason of their common membership of the same group does not mean that circumstances cannot arise where in more than one company in the same group each incurs liabilities in respect of damage caused to a particular plaintiff’.
  3. Lubbe v Cape Plc [2000] UKHL 41:
    • ‘The issues in the present cases fall into two segments. The first segment concerns the responsibility of the defendant as a parent company for ensuring the observance of proper standards of health and safety by its overseas subsidiaries. Resolution of this issue will be likely to involve an inquiry into what part the defendant played in controlling the operations of the group, what its directors and employees knew or ought to have known, what action was taken and not taken, whether the defendant owed a duty of care to employees of group companies overseas and whether, if so, that duty was broken’.

HOW HAS CHANDLER BEEN RECEIVED BY THE COURTS IN RECENT TIMES?

As we discussed in the introduction to this feature article, the last time that this topic was featured in BC Disease News was way back in 2014, when we reviewed the Thompson case, which followed Chandler.

Thompson was a pleural thickening case, commenced by a claimant whose work with the defendant’s subsidiary, between 1969 and 1970, involved handling raw asbestos.

Perhaps the best summary of the ruling in Thompson, which did not find the defendant liable, is this snippet of the judgment taken from His Royal Highness Okpabi v Royal Dutch Shell Plc [2017] EWHC 89 (TCC):

‘In Thompson's case [2014] 2 BCLC 97 the Court of Appeal concluded that, on the facts of that case, there was no duty on the part of a parent company. The claimant suffered from asbestos-related illnesses, and had worked in the 1970s with asbestos, including something called “hand baling” of actual asbestos. The conditions in which he had worked were described by the Court of Appeal as “really quite shocking and should be a cause for shame”. However, the employer companies themselves were not viable and had no insurance. The claimant therefore brought his claim against the parent holding company, which appealed against a finding at first instance that it owed him a duty of care. The proceedings were based on a claim that the parent company had assumed a duty of care towards employees of the subsidiary company for health and safety matters, by virtue of having appointed an individual as director of the subsidiary with responsibility for those matters. The Court of Appeal held that this act did not establish the necessary duty on the part of the parent company and (per Tomlinson LJ) identified the various factors which demonstrated that the case was some way removed from Chandler v Cape plc. None of the particular factors set out in para 80 of Arden LJ's judgment was found to be present in Thompson's case. At para 33, Tomlinson LJ stated that the formulation by Arden LJ was intended to be descriptive rather than exhaustive of the circumstances in which a duty may be imposed. He stated, at para 37:

“There is no evidence that the Renwick Group Ltd at any time carried on any business at all apart from that of holding shares in other companies, let alone that it carried on either a haulage business or, as would in fact be required were the respondent's case to have a prospect of success, a business an integral part of which was the warehousing or handling of asbestos or indeed any potentially hazardous substance. Thus the first of Arden LJ's indicia is not satisfied. This is no mere formalism, for as the balance of Arden LJ's indicia indicate, what one is looking for here is a situation in which the parent company is better placed, because of its superior knowledge or expertise, to protect the *1370 employees of subsidiary companies against the risk of injury and moreover where, because of that feature, it is fair to infer that the subsidiary will rely upon the parent deploying its superior knowledge in order to protect its employees from risk of injury.” (Emphasis added.)’

In this instance, the subsidiary was merely operating as a division of the group carrying on a single business and the Chandler test was not satisfied.

Since our previous article on this subject, several other reported cases have either considered, explained, applied, or followed Chandler. We communicate the most pertinent excerpts from these authorities in chronological order, below.

Vedanta v Lungowe [2016] EWHC 975 (TCC)Chandler APPLIED:

‘As a result of the cases set out above, it seems to me that the following principles can be identified:

  1. Every claim of this kind requires the claimants to satisfy the three part test in Caparo v Dickman.
  2. Depending on the facts, it is arguable that a claim in negligence against a parent company arising out of the operations of its subsidiary might give rise to liability: Chandler v Cape.
  3. For obvious reasons, such a claim is more likely to succeed if advanced by former employees (Ngcobo, Connelly v RTZ, Chandler v Cape). However, depending on the facts, claims made by residents, rather than former employees, are still arguable (Lubbe)’.

His Royal Highness Okpabi v Royal Dutch Shell Plc [2017] EWHC 89 (TCC)Chandler APPLIED:

‘In Chandler v Cape plc [2012] 1 WLR 3111 the Court of Appeal upheld the first instance judge who had concluded, after a trial, that the claim in negligence by the employees of a subsidiary against the parent company itself had indeed been made out. Although the personal injury was based on exposure to asbestos, I do not consider that this is any particularly special ingredient of this, or indeed any, of the cases, and the principles are not limited to asbestos exposure cases. Arden LJ rejected the defendants' submission that, in determining whether there had been an assumption of responsibility, the court was restricted to matters which might be described as “not being normal incidents of the relationship between a parent and subsidiary company”. Arden LJ made clear that the way in which groups of companies operated was very varied and that sometimes a subsidiary was run purely as a division of a parent company, even though the separate legal personality of the subsidiary was retained and respected. She said it was not possible to say in all cases what was or was not a “normal incident” of the parent/subsidiary relationship’.

‘When approaching the four factors that were identified by Arden LJ in Chandler v Cape plc [2012] 1 WLR 3111 as indicating the existence of a duty of care on the part of a parent company arising out of operations of a subsidiary, the purpose of the inquiry is to see whether “the parent company is better placed, because of its superior knowledge or expertise” than the subsidiary is in respect of the harm, and “moreover where, because of that feature, it is fair to infer that the subsidiary will rely upon the parent deploying its superior knowledge” in order to avoid the harm. Unless this is borne in mind, then the statements of Tomlinson LJ in para 37 of Thompson's case, which are plainly part of the ratio of that case, would have no effect. There is therefore a two-fold approach, and each of these two steps should be approached sequentially. The first is whether the parent company is better placed than the subsidiary. The second is, if the finding is that the parent company is better placed, whether it is fair to infer that the subsidiary will rely upon the parent. It is also the case that both the cases make an express distinction where the parent company is simply holding shares in other companies. This must be borne very much in mind.

The four factors listed by Arden LJ were the fact the companies were operating the same businesses; that the parent had superior or specialist knowledge compared to the subsidiary; that the parent had knowledge of the subsidiary's systems of work; and that the parent knew that the subsidiary was relying on it to protect the claimants. Although the factors are descriptive rather than exhaustive, the presence of some, or all, of those factors, would bring any particular case more closely within the scope of a duty of care owed by a parent company, the existence of which has already been recognised by the Court of Appeal. The higher the number of those four factors that are present, the more likely that will be’.

AAA v Unilever plc [2017] EWHC 371 (QB)Chandler FOLLOWED:

‘What Chandler shows is that a parent company may, on appropriate facts, and even though it does not exercise complete control over the operations of its subsidiary, be responsible for the health and safety of employees of the subsidiary, in particular where the parent knows that the system of work operated by the subsidiary is unsafe’.

Lungowe v Vedanta Resources Plc [2017] EWCA Civ 1528Chandler FOLLOWED:

‘It seems to me that certain propositions can be derived from these cases which may be material to the question of whether a duty is owed by a parent company to those affected by the operations of a subsidiary. (1) The starting point is the three-part test of foreseeability, proximity and reasonableness. (2) A duty may be owed by a parent company to the employee of a subsidiary, or a party directly affected by the operations of that subsidiary, in certain circumstances. (3) Those circumstances may arise where the parent company (a) has taken direct responsibility for devising a material health and safety policy the adequacy of which is the subject of the claim, or (b) controls the operations which give rise to the claim. (4) Chandler v. Cape Plc and Thompson v. The Renwick Group Plc describe some of the circumstances in which the three-part test may, or may not, be satisfied so as to impose on a parent company responsibility for the health and safety of a subsidiary's employee. (5) The first of the four indicia in Chandler v. Cape Plc [80], requires not simply that the businesses of the parent and the subsidiary are in the relevant respect the same, but that the parent is well placed, because of its knowledge and expertise to protect the employees of the subsidiary. If both parent and subsidiary have similar knowledge and expertise and they jointly take decisions about mine safety, which the subsidiary implements, both companies may (depending on the circumstances) owe a duty of care to those affected by those decisions. (6) Such a duty may be owed in analogous situations, not only to employees of the subsidiary but to those affected by the operations of the subsidiary. (7) The evidence sufficient to establish the duty may not be available at the early stages of the case. Much will depend on whether, in the words of Wright J, the pleading represents the actuality’.

AAA v Unilever plc [2018] EWCA Civ 1532Chandler CONSIDERED:

‘There is no special doctrine in the law of tort of legal responsibility on the part of a parent company in relation to the activities of its subsidiary, vis-à -vis persons affected by those activities. Parent and subsidiary are separate legal persons, each with responsibility for their own separate activities. A parent company will only be found to be subject to a duty of care in relation to an activity of its subsidiary if ordinary, general principles of the law of tort regarding the imposition of a duty of care on the part of the parent in favour of a claimant are satisfied in the particular case. The legal principles are the same as would apply in relation to the question whether any third party (such as a consultant giving advice to the subsidiary) was subject to a duty of care in tort owed to a claimant dealing with the subsidiary. Helpful guidance as to relevant considerations was given in Chandler v Cape plc; but that case did not lay down a separate test, distinct from general principle, for the imposition of a duty of care in relation to a parent company.

Although the legal principles are the same, it may be that on the facts of a particular case a parent company, having greater scope to intervene in the affairs of its subsidiary than another third party might have, has taken action of a kind which is capable of meeting the relevant test for imposition of a duty of care in respect of the parent’.

Vedanta Resources Plc v Lungowe [2019] UKSC 20Chandler EXPLAINED:

‘In my view, and that of the Court of Appeal in this case, the Chandler indicia are no more than particular examples of circumstances in which a duty of care may affect a parent. They were so described by Arden LJ when setting them out in the Chandler case. Although this if anything imposed an unnecessary straitjacket, both upon the claimants and the judge, it did not lead to the identification of a wider basis in law for the recognition of the relevant parental duty of care than that which, in my view, the law actually provides, by reference to basic principle’.

Rihan v Ernst and Young Global Ltd [2020] EWHC 901 (QB)Chandler APPLIED:

‘Sixth, the cases … concerning parents and their subsidiaries may or may not yield a duty of care owed by the parent, depending on the facts (see also Arden LJ's judgment in Chandler v. Cape plc [2012] 1 WLR 3111, at [80]). The injured claimant is likely to have a contract with the subsidiary but not the parent. To win against the parent the claimant must establish a duty of care in tort applying ordinary principles, but the content of the duty if established is effectively the same as, or close to, that of the duty owed by the subsidiary under the employment contract’.

CONCLUSION

Having scanned this feature article, it should be appreciated that Chandler is still good law on the matter of parent company liabilities, whilst not actually widening the position already settled by the longstanding 3-stage test, in Caparo. Upon assessment of whether a parent owed/owes a duty of care to its subsidiary(ies), Chandler presents a case-by-case fact finding exercise. Liability will not readily be found, nor will it be exclusive to actions involving asbestos-related diseases. A high threshold must be met, but the prize for surpassing this threshold in ‘appropriate circumstances’ is a substantial one.

 

[1] Samuel J Pearse, Raymond L Sweigart and Amina Adam, ‘Assumption of responsibility for a subsidiary's responsibilities’ (5 September 2012 Law Gazette) <https://www.lawgazette.co.uk/law/assumption-of-responsibility-for-a-subsidiarys-responsibilities/67165.article#> accessed 12 February 2021.