Wednesday, April 27, 2011

Parent Company's duty to employees of its Subsidiary


In an interesting judgment delivered earlier this month, Chandler v. Cape Plc. [2011] EWHC 951 (dt. 14/4/2011), it has been held that a parent company owes a duty of care to employees of its subsidiary. The decision contains a detailed analysis of the scope of the duty of care in such situations; and provides some indication that the existence of the corporate veil between the parent and its subsidiary (which was not pierced in the case) may not prevent a direct duty of care between the parties.

The Claimant, Chandler, was employed between 1959 and 1962 by a company – Cape Products. In 2007, the Claimant discovered that he was suffering from asbestosis which was caused due to exposure to asbestos in the course of his employment. Further, this exposure was caused in turn by negligence on the part of Cape Products. Cape Products, however, had long ceased to exist; and the Claimant framed his claim by alleging that at the relevant times, a duty of care was owed to him by Cape Plc., the parent of Cape Products. In effect, the claim was that Cape Products (subsidiary) and Cape Plc. (parent) were joint tortfeasors, jointly and severally liable to pay damages to the Claimant.

The Court began its analysis by noting:
the fact that the Claimant was owed a duty of care by Cape Products does not prevent such a duty arising between the Claimant and other parties.  No doubt, the fact that a duty situation exists between the Claimant and his employer is a factor to be taken into account when deciding whether another party owes the Claimant such a duty.  But, to repeat, the existence of the duty between the Claimant and his employer cannot preclude another person being fixed with a duty of care.  Second, the fact that Cape Products was a subsidiary of the Defendant or part of a group of companies of which the Defendant was the parent cannot mean by itself that the Defendant owes a duty to the employees of Cape Products.  So much is clear from Adams and others v Cape Industries plc & another [1991] 1 AER 929.  Equally, the fact that Cape Products was a separate legal entity from the Defendant cannot preclude the duty arising.  Third, this case has not been presented on the basis that Cape Products as a sham – nothing more than a veil for the activities of the Defendant.  Accordingly, this is not a case in which it would be appropriate to “pierce the corporate veil.”

The Court also accepted (on the authority of Smith v. Littlewoods Organisation Ltd [1987] A.C. 241) that in general, the law imposes no duty of care upon a party to prevent a third party from causing injury to another. However, the Court held (on the basis of Caparo v. Dickman) that this statement was subject to some exceptions. The exceptions were: “… a) where there was a special relationship between the Defendant and Claimant based on an assumption of responsibility by the Defendant; b) where there is a special relationship between the Defendant and the third party based on control by the Defendant; c) where the Defendant is responsible for a state of danger which may be exploited by a third party; and d) where the Defendant is responsible for property which may be used by a third party to cause damage…”

On the facts, it was held that Cape plc. had actual knowledge of the working conditions of the claimant – and this was “no failure in day-to-management; this was a systemic failure of which the Defendant was fully aware.” In such circumstances, the Claimant’s injury should have been foreseen by Cape plc. Further, “At any stage [Cape plc] could have intervened and Cape Products would have bowed to its intervention…” In view of this, it was held that the there was enough proximity between the Claimant and the Defendant to impute a duty of care on the defendant.

The Court did note that merely because there was a parent subsidiary relationship, it did not follow that the parent had a duty of care to the subsidiary’s employees. But besides the normal incidents of a parent-subsidiary relationship (such as the potential to address ‘systemic failures’), the only fact which the Court highlighted was that Cape plc. was itself medical officers who were given the responsibility of looking at the health and safety issues of all group employees.

This fact would of course be insufficient for piercing the veil of the subsidiary; but the Court has held that the absence of a factual foundation strong enough to pierce the veil need not mean that an independent duty of care cannot be established. On the facts, as Cape plc. retained the potential to alter the policies of its subsidiary, a duty of care was held to exist. In the context of a parent-subsidiary relationship, however, it would appear that such potential control would almost always exist. It is not clear when, on the Court’s analysis, the parent company would not have a duty of care to third parties which it knows are dealing with its subsidiary.The decision is an illustration of how the corporate veil may not always be an adequate protection for shareholders.

1 comment:

Rohit said...

This is quite a novel means of attracting liability: and oe more red flag for lawyers to take into account! In a sense, it seems like a trick to get around separate personality