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Generally as a matter of law a parent company, like any other
shareholder, enjoys limited liability in relation to its subsidiary
company's affairs, even if it owns all the shares. A recent
case in the Court of Appeal, however, highlights the way a
parent's behaviour can jeopardise the protection of limited
liability, so that direct responsibility for some aspects of the
subsidiary's business – in this case, the welfare of
its employees – attaches to the parent even where there
is little or no evidence of a formal policy decision to assume
responsibility.
The case concerned the company now known as Cape plc and its
subsidiary, Cape Building Products Ltd, which no longer exists. The
claimant, Mr Chandler, worked in the original brick-making business
of the subsidiary more than 50 years ago. At that time the
subsidiary, having become integrated into the parent's
business, also manufactured asbestos board on the same site, in a
factory with open sides, and dust from the factory spread to where
he was working outdoors a short distance away. By the late
1950s it was known that exposure to asbestos was life-threatening,
and the parent, which itself was long-established in making
asbestos products, had a scientific officer and medical officer,
who were responsible for health and safety issues for all group
employees. The parent had actual knowledge of Mr Chandler's
working conditions and the risk was obvious. He discovered in
2007 that he had asbestosis from exposure to the dust. The Court of
Appeal found that the parent had a direct duty of care to him.
Giving the main judgment, Lady Justice Arden said that, to
establish liability, the court does not have to find that a person
voluntarily assumed responsibility. The word
"assumption" was something of a misnomer: it would be
more accurate to speak of responsibility "attaching".
Responsibility for health and safety matters was likely to attach
to a parent company where:
the businesses of the parent and subsidiary were in a relevant
respect the same (for example, they produced the same type of
product);
the parent had, or ought to have had, superior knowledge on
some relevant aspect of health and safety in the particular
industry;
the subsidiary's system of work was unsafe, as the parent
company knew, or ought to have known; and
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.
She added that, on this last point, it was not necessary to show
that the parent was in the practice of intervening in the
subsidiary's health and safety policies: the court will
look at the relationship between the companies more widely, and
might find that the necessary standard of reliance 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. Here, the parent was
clearly in the practice of issuing instructions about the
subsidiary's products, and the subsidiary could not incur
capital expenditure without the parent's approval. It is not
the case (as was argued on the parent's behalf) that a duty of
care can only arise if the parent has absolute control. The court
also rejected the idea that one would have to show behaviour that
was outside the normal features of a parent-subsidiary relationship
(as it was not possible to say in all cases what was normal).
Apparently there are no earlier reported cases of a direct duty
of care on the part of a parent company. This will be an important
precedent for other claims and will not necessarily be limited to
personal injury cases: the same analysis could be adapted so as to
apply, for example, to environmental liability. The potential for a
direct line of liability to arise from the past activities of a
subsidiary – perhaps now dissolved or moved elsewhere in
the group – will also be a concern for a buyer of the
parent's shares and may need to be covered by warranties or
indemnities in the share purchase agreement.
This article was written for Law-Now, CMS Cameron
McKenna's free online information service. To register for
Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance
only. The information and opinions expressed in all Law-Now
articles are not necessarily comprehensive and do not purport to
give professional or legal advice. All Law-Now information relates
to circumstances prevailing at the date of its original publication
and may not have been updated to reflect subsequent
developments.
The original publication date for this article was
17/05/2012.
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