The Court of Appeal has allowed an appeal by a parent company, the Renwick Group plc (Renwick), against a judgment that it owed a duty of care to a claimant who was an employee of one of its subsidiary company in respect of his exposure to asbestos dust.
- Whilst proximity1 is a factor in deciding whether a duty of care exists, it cannot be inferred simply on account of a director being appointed by the parent company to a subsidiary company.
- The Court of Appeal restated theimportance of superior knowledge and expertise2 in relation to specific risks in deciding whether a duty existed.
- “The findings which the Judge was able to make on the basis of the very limited evidence available fell far short of what was required for the imposition of a duty of care on the Defendant.”3
The claimant, Mr Thompson, was employed as a driver in a haulage company David Hall & Sons Ltd (Halls) in the 1970’s which was taken over by a subsidiary of Renwick in a series of acquisitions.
Mr Rushton, who had a small number of shares in Renwick, took up the position of director at Halls. The Court heard no evidence as to whether Mr Rushton was employed by Renwick, Halls or another subsidiary in the Group.
The claimant recalled seeing a poster on kinetic lifting with Mr Rushton’s name on it after the takeover, which suggested that he had some responsibility for health and safety issues.
During his employment, the claimant was involved in manually unloading raw asbestos which may have caused or contributed to diffuse pleural thickening, a respiratory condition associated with exposure to asbestos fibre.
Unfortunately the claimant’s original employers were no longer in existence and no responsive liability insurance could be traced.
The claimant successfully argued at first instance before His Honour Judge Platts at Manchester County Court, that there was sufficient proximity between the parent company and the employees of the subsidiary for a duty of care to be imposed upon the parent company.
The Judge accepted that evidence which suggested that the parent company had put in place as director its own man Mr Rushton as director of the claimant’s employers was an indication that the parent company was taking control of the company and it was being run by and on behalf of the parent company.
The Judge also found that the proximity of the Renwick to Halls was shown by:
- Paperwork being used by thesubsidiary with the defendant’s name on it.
- The introduction of new lorries inthe defendant’s livery.
- An episode when the claimant’staxi fare from strike bond Southampton was paid by Renwick’s Exeter office.
- The sharing of deliveries, loads,and depots amongst the Group and ultimately the merger of various sites.
The Judge made reference to the four indicia which Lady Justice Arden set out in Cape v Chandler where the law might impose on a parent company’s responsibility for health and safety of its subsidiaries and employees, but he considered that they were issues relevant to the facts of the case in Cape v Chandler. In his judgment the significant factor in the case before him, was the degree of control exercised by the Defendant through Mr Rushton when he became Director.
Allowing the appeal, Lord Justice Tomlinson, who delivered the lead judgment in agreement with Lord Justice Rimer and Lord Justice Underhill, criticised the basis of the Judge’s findings in two principal respects:
The Company Law perspective
- The Judge was wrong to acceptthe mere fact that the defendant may have appointed Mr Rushton as Director of the subsidiary company as evidence that the parent company was actually in day to day control of the subsidiary.
- There was no evidence that theDefendant employed Mr Rushton and could exert control in that way.
- It was settled law that a director ofa company who had been nominated to that office by a shareholder (in this case the parent company as shareholder of the subsidiary) was under no duty to those putting him in that position.
- A director of a company as suchMr Rushton, owned a fiduciary duty to the subsidiary and no one else.
- Similarly the shareholders had noduty to the company in relation to the conduct of the director
- Lord Justice Tomlinson rejected thatthere was any basis on which it could have been concluded that in running the affairs of the subsidiary Halls, Mr Rushton was acting on behalf of the parent company. He was running it on behalf of itself and no one else’s behalf.
The Totality of Evidence
- The Court of Appeal returned totwo indicia set out by Arden LJ in Chandler v Cape.
- The Defendant and its subsidiary were not in a relevant respect the same. There was no evidence that Renwick’s had at any time carried on any business at all apart from that of holding shares in other companies, let alone that it carried on either a haulage business or a business, an integral part of which was the warehousing or handling of asbestos or any potentially hazardous substance.
- There was no basis on which itcould be asserted that the Defendant either did have or should have had any knowledge of the risks superior to that which the subsidiaries could be expected to have.
- “The findings of the Judge in relation to the intermingling of the businesses and the interchangeable use of depots and share resources were no more
- than a finding that the companies were operating as a division of the group carrying on a single business. That did not mean that the legal personality of the subsidiaries separate from that of their ultimate parent was not retained and respected.”4
What has been clarified?
- The case restates a long settledcompany case law that the appointment of a director by shareholders to a company does not mean, in itself, that the director owes any duty to the shareholders who nominated him.
- Similarly a shareholder does notowe, by reason only of his position as shareholder, any duty to anybody.
Why is this important?
One of the important factors in deciding whether a parent company might owe a duty of care to employees of a subsidiary company is the proximity between the parent company and the subsidiary.
The mere fact that a parent company, which is essentially the shareholder of a subsidiary company, appoints a director to a subsidiary company is not evidence as to the proximity between the two companies.
A director’s fiduciary duty is to the company of which he is the director. There is no bond of duties and responsibilities between a director and those who nominate him from a parent company which is relevant for issues of proximity.
What is relevant in deciding whethera parent company owes a duty?
The parent company must have knowledge of a particular risk which is superior to that which the subsidiary could be expected to have and that it is fair to infer that a subsidiary will rely on the parent company deploying the superior knowledge in order to protect the employees of the subsidiary
This takes us back to the position we were at in June 2012 when the Cape and Chandler judgment came out. At that time we identified the following risks:
Many companies which are set up in a group structure aim to maintain certain group wide best practices including standards of health and safety. Frequently, the best way of achieving this is to ensure the core of expertise which is with the parent company and is then available both as a resource to the subsidiary companies and as a tool to ensure minimum standards throughout the group. This model could now result in the Court finding that the parent assumed a direct duty to the subsidiaries employees.
This may be seen as an acceptable risk for a company which wishes to ensure that there is standardisation throughout the group in terms of levels of health and safety and other good practice.
Clearly the corporate identity and “brand” of the company will be supported by standards being enforced across the group and any costs savings will also be a major incentive for adopting this model. Conversely the reputation of a parent company could be damaged if a subsidiary operates to much lower standards of health and safety. This risks a perception that the parent company operates such a subsidiary at arm’s length in order to limit its liability. This might be particularly true if the parent company has subsidiaries in foreign jurisdictions.
We still believe that the principal areawhere Claimants will seek to hold a parent company responsible for acts of its subsidiary is where the subsidiary is no longer in existence or there is no suitable insurance in place or where there are advantages to sue in the jurisdiction of the parent company rather than a subsidiary.
Managing the risks
- The parent company needs to ensure that subsidiaries are fully insured for employer’s liability risks. If the subsidiary is insured the chances of a parent company being sued are smaller unless there are jurisdictional advantages in suing the parent company.
- Parent companies will need to consider with the insurers and insurance brokers the consequences of a claim made against them in respect of a subsidiary. Their own insurance policy may not cover such a claim and they may face paying all of the damages and costs for such a claim out of the companies own pocket. This would have been a consequence for the Renwick Group Plc had the claim against it been successful.
- Duties for managing the activities of a subsidiary may differ vastly:
- Less control. The less a company knows about and controls how a subsidiary company goes about its work and the less it operates a central core of knowledge to provide advice and guides for maintaining such standards, the more easily it can argue that there should be no imposition or assumption of responsibility to a subsidiary’s employees. As indicated above this strategy can have far reaching consequences for the image and reputation of a parent company.
- More control. The opposite strategy is to inform and exercise tighter control of standards of the parent company’s subsidiary in order to reduce the risk of claims. The parent company needs to have systems in place to provide information, guidance and supervision to its subsidiary companies in order to achieve standards of best practice.