When a parent company may be liable in negligence for the acts of its subsidiary

The most significant aspect of Chandler is that it addresses the injustice of many tort victims otherwise being denied a remedy when they have been injured as a result of the activities of subsidiary companies both here and overseas.

It is not always possible to sue the subsidiary company; the subsidiary may not have relevant insurance (such as in the case of Mr Chandler) and the subsidiary itself may have been wound up (again as in Chandler). It may also have insufficient assets. Claimants have for some time considered the possibility of suing parent companies instead as they are more likely to have sufficient means and remain in existence for a longer period of time. This is especially so in asbestos disease cases, where the injury develops many years ?after exposure. The Chandler case is the ?first where such a claim has been pursued to trial.

There are numerous situations, as demonstrated in Chandler, where a parent company has knowledge of the dangers of activities operated by a subsidiary company, but still does nothing to prevent them despite having the means to do so.

This knowledge can be acquired from a parent company's direct interaction with the subsidiary's operations onsite, or via the parent's close relations with and control of the subsidiary company itself.

When seeking to advance a claim based on this premise, a frequent defence put forward is that the parent company is shielded from liability by the corporate veil which treats the parent and subsidiary companies as separate legal entities. The argument is that liability rests solely with the subsidiary company which possesses a separate and distinct legal personality.

Attaching responsibility

However, there are many instances where third parties (that is parties other than the claimant's employer) can be held responsible. As such, there is no reason in principle why a parent company should be treated any differently to other parties such as independent contractors. In fact, a parent company can have a greater degree of involvement and responsibility for a subsidiary company's activities compared to an external contractor.

For this reason, Arden LJ, who delivered the leading judgment in the Court of Appeal, referred to various authorities where the issue of third-party liability was considered to determine whether the defendant parent company in this case could be held liable.

In Smith v Littlewoods Ltd [1987] AC 241, Lord Goff confirmed that there was no general duty of imposing liability on third parties where it is aware of a danger, but does nothing to prevent it. However, he considered this could arise if the relationship was such as to warrant it.

These 'special' relationships arise where there is an assumption of responsibility by the third party. Interestingly, Arden LJ considered the word 'assumption' a misnomer, preferring to define it instead as an 'attachment' of responsibility.

In determining whether such a duty was assumed/attached, Arden LJ could see nothing in the past cases requiring the parent company to exercise absolute control of the subsidiary, which, in any case, is the type of argument advanced when trying to pierce the corporate veil.

The evidence adduced on behalf of Mr Chandler indicated that Cape Plc had not just a direct involvement in the safety matters of its subsidiary company but also that it had a close connection with the subsidiary company itself. This was evinced by several aspects of their relationship such as that both companies shared directors, the parent company approved expenditure of the subsidiary and both companies were involved in the same core business of asbestos production.

Cape argued that these latter points were irrelevant as they are inherent in any parent subsidiary relationship but Arden LJ rejected this argument simply because there is no such thing as a typical parent subsidiary relationship.

In addition, it is difficult to justify disregarding these matters. Suppose an executive director sits at a board meeting of the subsidiary company (perhaps even at the subsidiary's premises where dangerous activities are undertaken) and then attends a meeting at the parent company. It seems nonsensical to ignore the knowledge that a parent company would acquire or ought to have acquired in this situation. This goes to knowledge, but does not suffice for establishing the existence of a relevant duty of care.

The court set down a test of where a parent company could be found liable, which include the following:

(1) the parent and subsidiary share the same business;

(2) the parent knew or ought to have had 'superior' knowledge of the dangers of certain practices;

(3) the parent knew or ought to have known that the subsidiary's practices were unsafe; and

(4) the parent knew or ought to have foreseen that either the subsidiary or its employees would rely on it using its knowledge for the employees' benefit.

Qualifying relationship

This qualification is welcome because it means that Chandler does not open the ?door for claims against any parent company, but confirms that certain relationships would qualify.

It is hoped the latter will address the injustice caused to many tort victims with no viable cause of action against their employers. It will also act as an authority to dispel the common defence frequently put forward in negotiations by parent companies that they are shielded by the corporate veil which stems from a misunderstanding of the basis on which such cases are advanced.

There is no reason why Chandler should be seen as eroding the corporate veil. The fact that the parent and subsidiary are separate legal personalities is inherent to the finding of liability in this case because the focus is on what the parent did or ought to have done in its own right.

As such, it is clear that many parent companies will need to rethink the way they organise and distribute their activities and the level of involvement they have in their subsidiary companies. The most secure means for a parent to avoid liability would be for it, rather than relying fully on the subsidiary's ability to implement effective health and safety systems, to do everything it can to protect those workers who contribute so much to group development.