Wednesday, April 25, 2012

Parent's Duty to Employees of its Subsidiary: Chandler v. Cape affirmed

In an earlier post, we had discussed the judgment of the England & Wales High Court in Chandler v. Cape plc, [2011] EWHC 951. In that case, the Court had held that in certain circumstances, a parent company would owe a duty of care to the employees of the subsidiary even in situations where the tests for lifting the corporate veil are not satisfied. This judgment has been affirmed today by the Court of Appeal in Cape v. Chandler, [2012] EWCA Civ 525.

The Court of Appeal “emphatically rejected” the proposition that the case was concerned with principles pertaining to lifting the corporate veil. It was common ground between the parties that the tests for lifting the veil were not satisfied; and the Court (para 70) expressly clarified that the issue was not one of separate legal personality, but of whether the parent company had a direct duty to the employees of the subsidiary.

The Court of Appeal noted that the law of negligence develops incrementally, and also pointed out that an analogous principle was available in the line of authority on the duty of a person to intervene to prevent damage to another. The Court referred to Lord Goff’s statement in Smith v Littlewoods Ltd., [1987] AC 241, that there is in general no duty imposed on a person to prevent third parties causing damage to another. However, Lord Goff had qualified this general rule: there could be a duty to third parties causing harm to each other in situations where there was “a relationship between the parties which gives rise to an imposition or assumption of responsibility”. The Court of Appeal held that this “assumption” of responsibility need not be a voluntary or conscious assumption of responsibility (Customs and Excise Commissioners v Barclays Bank, [2007] 1 AC 181).

The Court concluded (para 80), “… 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. 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…”

One issue which arises is this: is this “incremental development” of the law of negligence confined to “employee health and safety” cases, or would it extend beyond those cases in a more general commercial context? Can a parent have a duty of care to prevent a pure contractual breach by its subsidiary? The tests for liability in a commercial context would perhaps become clearer only after further development of the common law in this regard.

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