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Parent Companies Liable for Subsidiaries

iStock 000018766927XSmallThe Court of Appeal’s recent decision in the case of Chandler v Cape has far reaching consequences in terms of imposing a “Duty of Care” on a parent company for the health and safety of its subsidiaries employees.

The ruling involved the case of asbestosis sufferer David Chandler who successfully sued Cape plc. the parent company of his former employer, Cape Building Products Ltd, which manufactured asbestos products.

In 2007 Chandler discovered he had contracted asbestosis as a result of exposure to asbestos whilst working for Cape Building Products Ltd. However by 2007 Cape Building Products Ltd. no longer existed and its remaining insurance policies excluded asbestosis so Chandler issued a claim for damages against the parent company Cape plc.

In 2011 the High Court ruled that Cape plc. owed and had breached a “Duty of Care” to Chandler. This conclusion was based on the key findings that:

  • Cape plc. had detailed knowledge of the working conditions within Cape Building Products Ltd. and was aware of the risks presented by exposure to asbestos.
  • Cape plc. controlled health and safety policy and practice in relation to the manufacture of asbestos products throughout the group and had employed a group medical officer who was responsible for the assessment of asbestos risks to group employees. It was assumed therefore that Cape plc. had adopted the responsibility for ensuring that its own employees and those of its subsidiaries were not exposed to harm from exposure to asbestos.

Cape plc. appealed against the High Court’s decision arguing that the two companies must be treated as separate entities (separate legal personality principle).

The general principle of separate legal personality is that the acts and liabilities of a company are its own and not those of its shareholders.  The principle holds that in a group of companies, each subsidiary is a separate entity from its parent company and that neither the parent company nor its directors can be held responsible for the acts or liabilities of subsidiaries, even wholly owned subsidiaries, by reason of the corporate relationship alone. This principle is strictly adhered to by English courts.  However, the courts may disregard the separate legal entity principle in certain limited circumstances:

Whilst not strictly an exception to the principle of separate legal personality, under English law a parent company may incur liability alongside another member of its group in situations where it too owes a “Duty of Care” to the claimant.  Where a subsidiary is directly at fault of an act or omission, but harm suffered by a claimant is also the responsibility of the parent rather than caused solely by the subsidiary, then parent company liability may arise.  Whilst other cases have considered this potential liability, Chandler v Cape plc. is the first reported case in which explicit findings on this issue have been made and it sets out certain parameters as to when this type of parent company liability may arise.

In the case of Chandler v Cape plc. the Court of Appeal upheld the High Court’s decision saying that Cape plc. was "fully aware of the systemic failure" to control the release of asbestos dust at the Cape Building Products factory and knew of the health risks.  Particular weight was attached to the finding that Cape plc. had superior knowledge regarding the nature and management of asbestos risks.

The Court concluded that evidence showed that there were certain matters in respect of which Cape Building Products Ltd was subject to parent company direction.  In these circumstances, and given the superior knowledge of Cape plc. in relation to asbestos matters and its awareness of the potential safety risks, it was appropriate to impose a direct “Duty of Care” on Cape plc. for employees of Cape Building Products Ltd.  Cape plc. was in breach of this Duty by failing to advise Cape Building Products Ltd as to the steps it was required to take to provide a safe system of work and to ensure that these steps were carried out.

Judge Arden said the 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.

The Court of Appeal provided some general guidance on the circumstances in which a parent company may have a direct “Duty of Care” for the health and safety of the employees of its subsidiaries. This includes where:

  1. The businesses of the parent and subsidiary are in a relevant respect the same
  2. The parent had, or ought to have had, superior knowledge of health and safety
  3. The subsidiary’s systems were unsafe, as the parent company knew, or ought to have known
  4. The parent company knew or ought to have foreseen that the subsidiary or its employees would rely on it using that superior knowledge for the employees’ protection

In situations where health and safety policies and procedures are being set or influenced on a group wide basis or the parent company has a degree of control over the affairs of the subsidiary it is vital that organisations consider the potential liability risk that may arise. In the Chandler v Cape plc. case the liability arose not so much from the setting of health and safety policies and procedures by the parent company, but from the fact that it failed to address a known health and safety risk relating to its subsidiary despite having a degree of control over its affairs.

To help minimise liability exposure companies need to ensure group wide governance is rigorously applied to health and safety matters. Groups should ensure:

  • Suitable procedures exist to establish how group policy is formulated, procedural decisions are made and risk management processes are conducted
  • Adequate management reporting lines are in place to ensure group-wide policies and procedures are followed by all group companies
  • Periodic group and subsidiary health and safety audits are conducted competently and followed up to ensure any actions identified are completed and robust documentation systems are in place to provide an audit trail
  • Groups should consider the nature and scope of any health and safety reporting and other communications from subsidiaries to the parent and the extent to which these may or may not be protected by legal privilege in the relevant jurisdictions; and
  • When establishing new joint ventures or dealing with existing ones, shareholder companies should carefully consider the implications of providing guidance and/or intervention to the subsidiary in relation to health and safety matters.
  • Measures are put in place to ensure parent company intervention is not seen to control and direct the day-to-day management of the health and safety affairs of its subsidiaries as this could risk the parent assuming liability

In particular:

  • Major health and safety decisions should be considered and taken at the board or management meetings held by the subsidiary. All decisions should be carefully minuted
  • Responsibility for the management of health and safety affairs and for the taking of any less important decisions not requiring board level consideration should be clearly identified
  • Where individuals are directors of both the parent company and of a subsidiary they should make it clear when they are taking decisions on behalf of the subsidiary, that they are doing so in their capacity as directors of that entity.

In situations where group level intervention is unavoidable, as may be the case where there is potential for a serious health and safety incident to impact on commercial or operational  performance, or the group’s reputation may be damaged, then any group involvement should be carefully considered and implemented appropriately.

Groups should also review their existing insurance portfolios to ensure that their employers’ liability policies will respond to any liabilities that may arise to the employees of both their current and former subsidiaries.

Metro SRM have worked with numerous companies to provide guidance on matters of corporate health and safety. We employ CMIOSH qualified, OSHCR registered consultants who have the expertise and knowledge to provide sound advice regarding corporate health and safety compliance.