Lincoln Eatmon, GUEST COLUMNIST

Many parent companies with a focus on cost and efficiencies centralise certain group functions. In doing so, they may not have realised that there may be exposure to liability arising from the implementation of these functions in their subsidiaries.

They also may have sought comfort in the feeling that they would be protected by the corporate veil, in that, a shareholder is treated as a separate legal entity from the company and is not normally personally liable for the debts of the company.

The English courts in two decisions some years ago (the last being an unreported decision 1996) had indicated that it was arguable that a parent company could owe a duty of care which is an obligation to avoid acts or omissions which can be reasonably foreseen to be likely to cause harm to employees of its subsidiaries.

This issue was the subject of a recent decision by the English Court of Appeal in Chandler v Cape PLC (2012 EWCA).

This arose from a claim by Chandler who had been an employee of one of Cape's subsidiaries, Cape Products, and had contracted asbestosis as a result of being exposed to asbestos during the subsidiary's operations.

The subsidiary was already dissolved before the claimant was diagnosed with the illness and there was no insurance to cover him so that he was only left with the parent company as a target.

He therefore brought a claim against the parent company Cape PLC on the basis that the system of work at the subsidiary had been unsafe and that the parent company was liable as it owed a duty of care to him as it had accepted responsibility for the health and safety of the employees of the subsidiary and had control over that part of the subsidiary's business.

The court felt that the issues were: (1) whether the parent company had assumed responsibility for the safety of the employees of the subsidiary so as to give rise to a duty of care to those employees; and (2) whether the parent company had breached that duty of care.

The court found that the parent company on the evidence had assumed responsibility. It referred to an earlier English case which said that although there was no general duty to prevent a third party causing damage to another person there were exceptions and one exception was where the relationship between the parties was such that it gave rise to an imposition or assumption of responsibility on the part of the defendant of that duty.

The court pointed out that this was not a matter of piercing the corporate veil but simply whether what the parent company did amounted to taking on a direct duty to the subsidiary's employees.

health and safety

The position was succinctly stated by the court in its summary.

"In summary, this 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. Those circumstances include a situation where, as in the present case:

(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 went on to say that it will look at the relationship between the companies more widely.

The court may find the 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.

It seems quite clear from this, that parent companies whether national or multinational who organise their businesses on the basis of centralising certain functions, run the risk of being found to have assumed a duty of care to the employees of its subsidiaries and possibly to consumers of the products manufactured by the subsidiary.

The decision in Chandler v Cape PLC is extremely important as it is the first time that an employee has established liability on the part of his employer's parent company and that while it was based on liability in respect of health and safety it could equally be applied to consumers of products and services.

The question now is what should parent companies do to minimise this exposure.

It may mean that where services are provided to a subsidiary having a written agreement between the companies or some other documentation which clearly sets out the responsibilities of each party.

If a duty of care is found to exist it needs to be clearly evidenced that the parent company has complied with that duty.

Companies should, therefore, reassess the centralisation of these activities to determine their exposure to claims.

Lincoln A.C. Eatmon is an attorney-at-law at DunnCox in Kingston. Send feedback to lincoln.eatmon@dunncox.com