Legal Briefing

Sins of the father

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Dispute resolution | 01 September 2012

It is a well-established principle of company law that a company has a separate legal personality from its members (Salomon v A Salomon & Co Ltd [1897]). In certain limited circumstances, such as where the corporate structure has been used for the purposes of a fraud or as a device to avoid an existing contractual or legal obligation, the court will ‘pierce the corporate veil’ but, as a general rule, shareholders will not be liable for a company’s acts or omissions.

However, in the recent case of Chandler v Cape Plc [2012], the Court of Appeal held that a parent company owed a duty of care to an employee of one of its former subsidiaries. The decision was based on well-established rules about the tort of negligence, rather than on the basis that the corporate veil should be pierced, and leaves intact the principle that a company has a separate legal identity from its shareholders. Nevertheless, it may have wide reaching implications for parent companies and other shareholders since it means that company owners can no longer guarantee that their liability in relation to a subsidiary will be limited to the value of their investment.

This article will discuss the facts of this case, the circumstances in which a parent company might be liable to a subsidiary’s employees and the potential implications this may have on the way corporate groups are organised and managed.


BACKGROUND TO THE CLAIM

Cape Plc (Cape) was founded in 1893 and for over 70 years was one of the world’s largest miners of asbestos and producers of fire-resistant asbestos products. The asbestos was mined in South Africa and made into asbestos products through a network of factories across the UK.

In 1945 Cape was looking to expand its production capacity and to do this it decided to rent an empty factory at a site some thirty miles away from Cape’s main UK facility. Cape rented this site off a third party, Uxbridge Flint Brick Company Ltd (UFBC) and it managed the production of asbestos on these premises for a number of years (as a tenant) before eventually purchasing UFBC in 1953. Shortly thereafter, in 1956, Cape sold its asbestos business to UFBC and changed UFBC’s name to Cape Building Products Ltd (Cape Products).

Cape Products operated two distinct businesses at its premises: i) its asbestos business and ii) a brick-making business. These businesses were operated in separate buildings; the asbestos production took place in an open-sided warehouse, which was adjacent to the brick-making site. Mr Chandler, the claimant in this case, was employed in Cape Products’ brick-making business between 1959 and 1962. Due to the open sides of the asbestos factory, asbestos dust frequently blew out over the area in which Mr Chandler worked.

In 2007, long after his employment had terminated, Mr Chandler discovered that he had contracted asbestosis. It was accepted that he had contracted this as a result of his employment with Cape Products. However, Cape Products had been dissolved a number of years ago and its employer’s liability insurance did not cover asbestosis. Mr Chandler therefore brought a negligence claim against Cape Products’ parent company, Cape, on the grounds that Cape and Cape Products were joint tortfeasors who were jointly and severally liable to pay him damages.


THE TORT OF NEGLIGENCE

In order to succeed in an action for negligence it is necessary for the claimant to establish that:

  • the defendant owed a duty of care to the claimant;
  • the defendant breached the duty owed to the claimant; and
  • the defendant’s breach of duty caused the claimant to suffer recoverable loss.

At the time Mr Chandler was employed by Cape Products, it was known that people risked contracting asbestosis if they were exposed to asbestos in substantial concentrations. As a result of this Cape accepted that if it was found to have owed a duty of care to Mr Chandler, it would have breached that duty and that the damage caused to Mr Chandler was foreseeable. Therefore the only issue was whether Cape owed a duty of care to Mr Chandler.

The Courts have developed three interrelated tests to determine whether or not a party owes a duty of care to another, namely:

  1. The ‘assumption of responsibility test’, which asks whether the defendant has undertaken a responsibility towards the claimant to exercise reasonable care and skill (see Henderson v Merrett Syndicates Ltd [1995]).
  2. The ‘threefold test’ which asks whether i) the damage that has occurred was foreseeable; ii) there was a sufficiently proximate relationship between the parties; and iii) it is fair, just and reasonable in all the circumstances to impose a duty of care (see Caparo Industries v Dickman [1990]).
  3. The ‘incremental test’ whereby the law recognises categories of cases in which duties are owed by analogy with existing cases where it has already been established that duties of care are owed (see Murphy v Brentwood DC [1991]).

In this case, the focus was on the threefold Caparo test and, in particular, the second limb (proximity) – there being little dispute that the other two limbs were satisfied. However, in the Court of Appeal, Arden LJ made some interesting comments about the assumption of responsibility test, saying that it fell within the second and third limbs of the Caparo test. She also suggested that the phrase ‘assumption’ of responsibility was something of a misnomer because it wrongly implies that the court has to find that a defendant has voluntarily assumed responsibility. She added that the phrase ‘attachment’ of liability might be more apt.


FIRST INSTANCE

At first instance, the judge looked at the evidence regarding how the Cape group was run.

  1. He noted that there were a number of common directors. The chairman of each subsidiary was an executive director of the parent company and reported to the managing director of the parent company.
  2. He concluded that the managing director of each subsidiary company had a wide measure of autonomy in day-to-day matters but was responsible to the chairman of the subsidiary concerned and consulted him on all major policy decisions.
  3. He found that the board of Cape was involved in major decisions over production, expansion and funding throughout the group. This left him in little doubt that Cape exercised control over some of the activities of Cape Products from the time it came into existence and during Mr Chandler’s period of employment.

Those findings (which are probably fairly representative of a number of group companies) were not the end point of the judge’s deliberations but set the scene for his subsequent findings.

Cape argued that, although it was entitled to exercise control over a subsidiary from time to time, this did not mean it controlled all important decisions and in fact many decisions were taken without reference to Cape. This was accepted by the judge but he said it was enough for Mr Chandler to establish that Cape either controlled or took overall responsibility for the measures adopted by Cape Products to protect it against harm from asbestos exposure. In that respect, the evidence revealed that:

  1. there was a group medical adviser from the late 1940s with responsibility for the health and welfare of all the employees within the group. In 1961 the group medical adviser was involved in an investigation of an employee with an asbestos-related disease at Uxbridge;
  2. there was a group chief scientist or chief chemist concerned with the suppression of dust and not only in factories directly operated by Cape;
  3. Cape had originally adopted the working processes for the production of Asbestolux at the factory at Uxbridge and these had been inherited by Cape Products;
  4. as and when Cape felt it appropriate, it did control what Cape Products was doing regarding the Asbestolux production process (particularly that which involved substantial expenditure).

The judge concluded it was Cape, not Cape Products, which dictated policy in relation to health and safety issues. He accepted that Cape Products retained some responsibility for the implementation of health and safety policies. However, he took the view that if Cape had intervened at any time and ordered Cape Products to alter its working practices, Cape Products would have ‘bowed to its intervention’. On that basis, the first instance judge found that there was a sufficiently proximate relationship between Mr Chandler and Cape to establish that Cape owed Mr Chandler a duty of care.


COURT OF APPEAL

Cape appealed this decision on a number of grounds, including that the judge applied the wrong test for the imposition of liability on a parent company. In particular, Cape submitted that the judge erred in that he did not hold that Mr Chandler was required to prove features in the relationship between Cape and Cape Products that went beyond the usual characteristics of the relationship between parent and subsidiary. (Cape identified the following as being normal incidents of the parent/subsidiary relationship: obtaining the approval to capital expenditure; having common directors; transferring bank accounts to the same bank, producing the same product and the fact that the parent controlled certain aspects of the subsidiary’s activities.)

However, Lady Justice Arden, who gave the only reasoned judgment in the Court of Appeal, rejected this argument on the basis that i) there was no authority to support it and ii) that it is not possible to say what is or is not a ‘normal incident’ of the parent/subsidiary relationship. Arden LJ also rejected the argument that a duty of care can only exist if a parent has complete control of a subsidiary. In her view, the question was simply whether what Cape did amounted to taking on a direct duty of care towards Cape Products’ employees.

On that issue, Arden LJ’s reasoning was similar to that of the first instance judge. She noted that, having initially established its own business at Uxbridge and having maintained a level of control over the business once it had been transferred to Cape Products, Cape knew that the Uxbridge asbestos business was carried on in a way which risked the health and safety of others at Uxbridge, most particularly the employees engaged in the brick-making business. While Cape was not responsible for the actual implementation of health and safety procedures at Uxbridge, the problems in this case were not caused by the failure of day-to-day management. They were systemic in nature. Cape could, and did on other matters, give Cape Products instructions as to how it should operate and the evidence showed that Cape Products complied with those instructions. Furthermore, Cape had superior knowledge of the nature and management of asbestos risks and was, therefore, better placed than Cape Products to understand those risks.

Against that background, Arden LJ had ‘no doubt’ that Cape had assumed a duty of care to either: i) advise Cape Products on what steps it had to take to protect its employees from a risk of asbestosis; or ii) to ensure that such steps were in fact taken. Whichever way the duty was formulated, Cape had failed to comply with it and the injury to Mr Chandler was the result.

COMMENT

Arden LJ emphasised that there was no imposition of liability or assumption of responsibility by reason only that Cape was the parent of Cape Products. She was also clear that this was not a case of piercing the corporate veil. The decision, therefore, makes no inroads into the principle that a company has a separate legal identity from its shareholders.

However, while the existence of a parent/subsidiary relationship does not necessarily mean that the parent will owe a duty of care to the subsidiary’s employees, it does not preclude the existence of such a duty either. Arden LJ explained that: ‘this case demonstrates that in appropriate circumstances the law may impose on a parent company responsibility for the health and safety of its subsidiary’s employees’. She added that those circumstances include a situation where, as in this case:

  1. there is an overlap between the businesses operated by the parent and the subsidiary;
  2. the parent has superior knowledge of the health and safety aspects of that business;
  3. the subsidiary’s system of work is unsafe and the parent company knew about this (or ought to have known); and
  4. the parent knew or ought to have foreseen that the subsidiary or its employees would rely on the parent using its knowledge for the employees’ protection. This does not require a claimant to show the parent was in the habit of intervening in the health and safety practices of the company – it may be sufficient to show that the parent has a practice of intervening in the trading operations of the subsidiary, for example production and funding issues.

The Court of Appeal will undoubtedly have felt some sympathy for Mr Chandler. He had contracted a serious illness and, if he had failed in his claim against Cape, he would have been left without a remedy. It remains to be seen whether the courts will adopt the same approach to claims brought in less extreme circumstances or outside the context of a personal injury claim. However, the situation described in paragraphs one to four above is not particularly unusual and parent companies may see an increase in the number of claims they receive from employees of their subsidiaries or former subsidiaries.

Parent companies of subsidiaries that operate hazardous businesses (or parent companies that used to own such subsidiaries) may wish to review their insurance policies to ensure that they have appropriate cover for any claims which employees or former employees might bring against them. Purchasers of companies in high-risk industries should also conduct wider due diligence than hitherto conducted in order to evaluate whether there is a risk of such claims being made.

The decision may also cause some corporate groups to reconsider how health and safety and environmental issues are dealt with – while bearing in mind that, the more control parent companies exercise over the implementation of health and safety policies, the greater the chance they will be found to have assumed responsibility for them. A sensible approach may be for parent companies to ensure that all available information, advice and, where appropriate, research is passed on to subsidiaries and to oversee health and safety procedures with a view to eradicating any systemic failures but at the same time to make it clear that the implementation of those policies is the responsibility of the subsidiary.