The High Court recently held that a parent company owes a common law duty of care to the employees of its subsidiary because it retained overall responsibility for the relevant matters in relation to those employees. Although the Court emphasizes that this is not a case of "piercing the corporate veil" of the parent company, the decision has a rather similar effect and will impact on how group companies are managed.
The claimant was an employee of Cape Building Products Ltd (Cape Products) at a site which manufactured asbestos boards. During the course of his work, the claimant was exposed to asbestos dust which was produced during the manufacture of the boards and contracted asbestosis. His exposure had been caused by negligence and constituted a breach of statutory duty on the part of Cape Products.
At the relevant time, Cape Products was a wholly-owned subsidiary of Cape Plc and one of many subsidiary companies within the Cape group which had as its core business the production of asbestos-based products. However, Cape Products had no policy of insurance to indemnify it against claims for damages for asbestosis and had ceased to exist at the time of the claim.
Cape Plc controlled aspects of the group's core business even when the business was undertaken by a subsidiary company. The extent of this control was the most strongly contested issue of fact in this case. The court emphasises the following facts:-
- Cape Plc and Cape Products had common directors: the chairman of each subsidiary was an executive director of the parent company and reports to the managing director of the parent company. 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 and consulted him on all major policy decisions.
- Cape Plc employed a group medical adviser and a chief scientist who were responsible, between them, for the health and safety issues relating to all the employees within the group of companies.
- Upon becoming a wholly-owned subsidiary, Cape Products adopted the working practices of its parent company.
- Many aspects of the production process were discussed and authorised by the board of Cape Plc - "As and when it felt it appropriate the Defendant [i.e. Cape Plc] did control what Cape Products was doing."
The Court held that, while there is no general duty to prevent a third party from causing damage to another, a parent company owes a duty of care to the employees of its subsidiary if it controls or retains overall responsibility for the relevant matters in relation to those employees.
The Court acknowledges that the mere fact that Cape Products was a subsidiary of Cape Plc and part of the Cape group of companies cannot mean by itself that Cape Plc owed a duty of care to the employees of its subsidiaries. However, equally, the existence of a duty between a subsidiary and its employees cannot preclude "another person being fixed with a duty of care".
There was no evidence that Cape Products acted as an agent for Cape Plc or that Cape Products should not be considered as a separate legal entity from its parent company. The Court emphasises that itt is therefore not a case of "piercing the corporate veil" of Cape Plc.
In determining whether Cape Plc owed a duty of care to employees of its subsidiary, the Court applied the three-stage test established in Caparo Industries v Dickman which asks whether:-
- the damages were reasonably foreseeable;
- the relationship between claimant and defendant was one of proximity; and
- owing such a duty would be fair, just and reasonable.
The following three factors weighed in favour of the Court's finding that the relationship between the parent company and the employees of its subsidiary satisfied the proximity element of the Caparo test:-
- Group officers. Having group officers with responsibility for the relevant issue in relation to all employees within the group of companies. In the case at hand, Cape Plc employed a scientific officer and a medical officer who were responsible for health and safety issues relating to all employees within the group.
- Centrally dictated policy. Having a centrally stipulated policy in relation to the relevant issue that applies to all group companies. Insofar as the group's core business impacted upon health and safety, it was Cape Plc, not Cape Products, which dictated policy in relation to health and safety issues.
- Retaining overall group-wide responsibility. It is not necessary to show that the parent company controlled all activities of the subsidiary. It is sufficient to establish that the parent company either controlled or retained overall responsibility for the measures adopted by its subsidiary to protect its employees against foreseeable harm. In the case at hand, the Court found that Cape Plc retained overall responsibility for ensuring that its own employees and those of its subsidiaries were not exposed to risk of harm as "[A]t any stage it could have intervened and Cape Products would have bowed to its intervention".
The case is interesting as it establishes the circumstances which may result in a parent company owing a common law duty of care to prevent its subsidiary - a separate legal entity - from causing foreseeable damage to its employees.
While the three elements that are needed to establish the existence of such a common law duty of care (foreseeability, proximity and reasonableness) are well established since Caparo, this case contains a thorough analysis of the factors courts will take into account when applying the proximity test in the context of a group of companies. The central theme of the proximity analysis is the extent to which the parent company retained control and /or assumed responsibility for the particular matter across the group as a whole.
The level of control exercised by Cape Plc over its subsidiaries is very common in practice and often used to keep certain liabilities contained within a particular group entity. The case at hand raises the question whether such group structures can in future be successfully used for that purpose. The Court's reasoning can also easily be applied in a broader context in relation to other stakeholders, for instance customers. It therefore potentially increases the liability exposure of corporate shareholders in a typical group structure in which the parent company exercises a certain degree of control over the affairs of its subsidiaries.