Parent companies and limited liability protection

There is a long held belief that parent companies, as separate legal entities from their subsidiaries, enjoy limited liability in relation to the failings of their subsidiaries. This is otherwise known as the corporate veil.

The protection that the corporate veil offers was challenged in the case of Chandler v Cape plc [2012]. Over half a century ago, Mr David Chandler worked for Cape Buildings Products Ltd (the Subsidiary), a wholly owned subsidiary of Cape Plc (the Parent Company). The Subsidiary was in the business of manufacturing of asbestos boards, which took place in a factory with open sides a short distance away from where Mr Chandler worked outdoors.

By the late 1950s, the life threatening nature of asbestos had been recognised. The Parent Company, which was also involved in the manufacture of asbestos products, appointed scientific and medical officers, who were responsible for all health and safety issues for all group employees. The Parent Company had actual knowledge of Mr Chandler’s working conditions.

In 2007, Mr Chandler was diagnosed with asbestosis following his exposure to asbestos. There had been no doubt that the Subsidiary had breached its statutory duty and had been negligent in exposing Mr Chandler to asbestos. However, when Mr Chandler brought his claim the subsidiary no longer existed and there were also no employer’s liability policies in place to cover his claim. Therefore, Mr Chandler pursued his claim against the Parent Company.

Mr Chandler was successful at first instance and was awarded £120,000 in compensation. The Parent Company appealed to the Court of Appeal, arguing that it did not have complete control of the Subsidiary.  This argument was rejected. The appeal decision was founded on the basis of the common law concept of ‘assumption of responsibility’. Within her judgment, Lady Justice Arden stated that the court does not have to find that the relevant party has voluntarily assumed responsibility. She described the word “assumption” as something of a misnomer and said that the phrase “attachment” of responsibility might be more accurate. 

Arden LJ went on to state that in appropriate circumstances the law may impose on a parent company responsibility for the health and safety of its subsidiary's employees. She then outlined those circumstances. A parent company is likely to be responsible where:

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.

For the purposes of (4) it is not necessary to show that the parent is in the practice of intervening in the health and safety policies of the subsidiary. The court will look at the relationship between the companies more widely. 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.

Those circumstances above were deemed to be present within the facts of Chandler v Cape. Consequently, the Parent Company was found to have assumed a duty of care to advise the Subsidiary on what steps it had to take and to ensure those steps were taken. Therefore, the Parent Company was held to be directly responsible for the welfare of the Claimant.

There are no earlier reported cases of a direct duty of care on the part of a parent company. It is difficult to determine how the courts will interpret, apply or distinguish this decision in future. The reasoning will not necessarily be limited to personal injury cases. The same analysis may apply to environmental liability cases for example.

Following the outcome of Chandler v Cape, those considering buying shares in a parent company should consider limiting their liability, in relation to the past activities of subsidiaries, with the use of warranties or indemnities in the share purchase agreement.