The recent case of Chandler v Cape Plc (2012) EWCA Civ 525 sees the Court of Appeal uphold the High Court decision that a parent company can, in appropriate circumstances, owe a duty of care to an employee of a subsidiary company.

The facts

While he was an employee of Cape Building Products Limited (“CBP”) between 1959 and 1962, Mr Chandler contracted asbestosis as a result of migration of asbestos dust from an open-sided factory adjacent to the area in which he worked. His condition was only discovered in 2007 by which time CBP had been dissolved. While it was possible to reconstitute CBP, the employer’s liability insurance policy under which Mr Chandler’s claim fell specifically excluded pneumoconiosis, previously determined by the court to cover asbestosis. As a result, there was no practical benefit in reconstituting CBP for the purposes of the claim. Mr Chandler therefore brought his claim against the parent company, Cape Plc (“Cape”).

There was no doubt about the cause of Mr Chandler’s asbestosis or that CBP had been negligent and in breach of the statutory duty owed to him. The issues for the Court were:  

  1. Whether a duty of care was owed by Cape to Mr Chandler to prevent the exposure of which he complained
  2. Whether Cape was proved to be in breach of the relevant duty  

Cape conceded that if a duty of care was owed, liability would follow but disputed that any such duty could be established.  

The conclusions of the Court of Appeal

It was held that the relationship between the companies was such that Cape could be seen to have “assumed responsibility” for the health and safety procedures of its subsidiary company, that there was “sufficient forseeability” of harm and accordingly it was fair, just and reasonable for Cape to owe a duty of care to Mr Chandler.

While it is important to remember that cases of this nature are inherently fact-specific, it is helpful to unpick some of the key reasons for finding an attachment of responsibility. These include:  

  • Due to exclusions within the insurance policy, there was no relevant policy of employer’s liability insurance to protect Mr Chandler
  • At no relevant point in time did Cape cease to be an operating company or merely hold the shares in its subsidiaries as if it were an investment holding company
  • At all material times there were one or more directors of Cape on the board of CBP
  • The suggestion that the company policy of Cape on subsidiaries was that there were certain matters eg, capital expenditure, in respect of which they were subject to parent company direction
  • Cape was fully aware of the “systemic failure” which resulted from the escape of dust from a factory with no sides and had superior knowledge about the nature and management of asbestos risks
  • It did not matter that the parent company was not involved in implementing the systems; the omission of failing to pass on relevant information which would have a bearing on health and safety was sufficient  

General principles arising?

The court took the opportunity to elaborate on the circumstances which may impose on a parent company a duty of care for the health and safety of its subsidiary’s employees. These circumstances include:  

  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
  4. The parent knew or ought to have foreseen that the subsidiary, or its employees, would rely on using this superior knowledge for the employees protection. It is not necessary to show that the parent is in the practice of intervening in the health and safety policies of the subsidiary, if the wider relationship of the companies evidences a practice of intervening in trading operations eg, production and funding issues  

A conclusion that the decision in Chandler leaves the parent company open to increased liability appears unavoidable. The law of negligence is incremental in nature and it is therefore, at least possible that the tortious duty of care owed by a parent company could extend beyond the sphere of health and safety.

So where does this leave the parent company?

It is important that the judgment is considered in the context of the court’s very clear message that this is not a “piercing of the corporate veil”, which exists to protect the separate legal identity of parent and subsidiary. Thus while there is no immediate need for panic, parent companies may wish to consider the following before engaging in the affairs of a subsidiary:  

  • Who has ultimate responsibility and control for compliance with group rules and procedures, and how this is evidenced?
  • How are group policies communicated and reported?
  • What level of control and direction does the parent company exercise over the group? Are appropriate communication channels provided to enable all relevant information to pass from parent to subsidiary and vice versa?
  • Where individuals sit as directors on both boards, is the capacity in which they are acting clearly documented?
  • Has a review of existing insurance portfolios been undertaken to ensure that employers’ liability cover extends to any potential liability arising out of such tortious duties of care?