In the recent novel case of Chandler v Cape Plc [2012] EWCA Civ 525, the Court of Appeal held that a parent company could be held directly responsible for an act or omission of its subsidiary. This outcome has wide reaching ramifications for the aviation industry. The case principles could stretch to other categories of claimant and other types of tortious claim, and natural members and other company controllers could incur personal liability.

Background to the claim

Mr Chandler was employed by Cape Building Products Ltd (“CBP”), a wholly owned subsidiary of Cape plc (“Cape”), between 1959 and 1962. During the course of his employment he was exposed to asbestos fibres and was diagnosed with asbestosis in 2007.

When Mr Chandler came to sue, he discovered that CBP had been dissolved and crucially that its insurance policy contained a broad exclusion that prevented recovery for this type of illness. In view of this, a claim was brought in negligence against the company’s parent, Cape.

Whilst the parties did not dispute that CBP had breached its duty of care, Cape argued that it was not accountable for the acts of CBP because it was a separate and distinct legal personality. Cape attempted to rely on the principle of the corporate veil, which provides that each company is a different legal person from its shareholders and that the liability of those shareholders in respect of the actions of the company is limited.

Mr Chandler produced evidence which showed that Cape had direct involvement in the health and safety matters of CBP. He also demonstrated that the two companies had shared directors, that Cape had approved the expenditure of CBP and that the companies shared the same core business. Cape contended that these were matters fundamental to a parent-subsidiary relationship.

Court of Appeal decision

It was held that a typical parent-subsidiary relationship did not exist in this instance and that the parent company had superior knowledge of the health and safety of the particular industry. Cape was found to be liable for damages for the breach of CBP and the Court of Appeal upheld the High Court’s award of £120,000.

Lady Justice Arden, giving the leading judgment, recognised that a direct duty of care could arise in the following circumstances:

  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.

It was noted that 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.

The Court of Appeal rejected any suggestion that the decision impacted directly on the concept of piercing the corporate veil, rather it was based on well-established rules about the tort of negligence. Cape was held accountable for its own failure to act responsibly.

The Court of Appeal was careful to stress that the duty of care from the parent company to the employee of one of its subsidiaries does not arise automatically, the court will assess each case on its own factual merit in order to ascertain whether the parent has taken on direct responsibility from the employees of its subsidiary. Nevertheless, company owners can no longer guarantee that their liability in respect to a subsidiary will be limited to the value of their investment.

Application

Some airlines have formed low-cost subsidiaries. These are distinct legal entities but the parent may direct the subsidiary to follow a particular policy in order to maximise its revenue (operational need). That may be enough on this ruling to make the parent liable to someone damaged by the low-cost airline following the policy.

This case should be noted by group companies, particularly those who may have employees with latent personal injury claims and where the directly employing no longer exists, is unable to meet a claim for damages, or does not have adequate insurance. It is likely that parent companies may experience an increase in claims from existing and former employees of their subsidiaries who recognise that they now have another possible cause of action.

The decision does not only affect companies in this country but also multinational companies headquartered in the UK with subsidiaries in developing countries. Overseas operations have greater scope to cause direct harm to employees, the local environment and consumers and therefore expose parent companies to more risk. Forum shopping claimants may argue that because a UK domiciled parent expressed an interest in the commercial affairs of an overseas subsidiary, the parent owed a duty to the claimant.

This case serves as a timely reminder that good governance across group companies should be firmly established. It is recommended that company policies and procedures are reviewed so as to ensure that there is a clear understanding as to where group decisions are made and ultimate responsibility lies. Essentially, parent companies need to assess whether they have an “attachment of responsibility” arising from the liabilities of their subsidiaries.

Parent companies would be sensible to oversee health and safety policies in order to remove systematic failures but at the same time make it clear that the implementation of those policies is the responsibility of the subsidiary. Parent companies could also ensure that those responsible for the health and safety matters in subsidiaries are given as much information as those at a parent company. The benefits of making a subsidiary responsible for the management and operation of their own health and safety policies would need to be balanced against the costs in terms of reduced parent company control, efficiency, consistent group policies and possible increased subsidiary liability.

The protection for a parent company would be to ensure its subsidiaries were always fully insured. It would be prudent for companies to review their existing insurance policies in order to ascertain whether they are wide enough to cover this newly established duty of care.