A recent Court of Appeal in Chandler v Cape plc [2012] EWCA Civ 525 decision has found that a parent company owed a duty of care to its subsidiary employees.
This is the first time an employee has successfully established liability to him from the parent company. Some people are claiming this is an attack on the separate legal personality principles, fundamental to company law. The case of Adams v Cape [1990] Ch 433 affirmed that a group of companies was not one legal entity. Each individual company in a group has its own legal personality. Whilst at first glance one may think this is open to abuse by having a rogue trader set up a number of companies to avoid liability this very rarely happens in practice. On the contrary allowing a group company to have different legal personality is beneficial for reasons such as diversification in business or due to geographical locations. Arcadia may be a good example of this. Furthermore, there are market forces that, at some level, prevent the abuse by parent companies of their subsidiaries, especially if they have similar creditors or suppliers.
Returning to the Chandler case the court found a duty of care was owed by the parent company to the employee of the subsidiary. The court of first instance had applied the test for how a duty of care is established, which is highlighted from the case of Caparo Industries v Dickman [1990] 2 AC 605 that a duty of care is owed if there is:
1) Reasonable to foresee harm
2) Proximity
3) Whether it is fair, just and reasonable for a duty of care to be owed
So, it may not come as quite a surprise that a duty of care was owed by the parent company to the employees of the subsidiary when one looks at this test. If the facts of the case demonstrate this three criteria then stringent rules of separate legal personality should not prevent a duty of care being owed. That would effectively, and excuse my limited knowledge of tort, go against basic principles that developed from Donoghue v Stevenson [1932] UKHL 100. To the effect it would basically imply if the parent company could not be liable then a manufacutrer of goods could not be liable to an eventual purchaser due to an intervening supplier of the goods after production.
And one must argue that the facts of the case do support a duty of care being owed. Here the parent company had superior knowledge of the health and safety of the particular industry; the parent company knew, or ought to have known that the subsidiaries system of work was unsafe; The parent knew or ought to have foreseen that the subsidiary or its employees would rely on its using the superior knowledge for the employees' protection and it was not necessary to show the parent company often interfered with the health and safety practices of the subsidiary. The court will look at the relationship between the companies more widely.
So is this piercing the corporate veil and ignoring the principle of separate legal personality for different companies in a group. The court was emphatic in rejecting such a notion. They note the question was simply whether the parent company owed a duty of care. An article written by Eccles suggest that this does pierce the corporate veil. But his arguments as to why seem to be merely restating the facts and recognised law in relation to duty of care, rather than stating why the veil has been pierced here.
He notes this pierces the corporate veil...'but only on the basis of an existing concept of assumption of responsibility - Caparo Industries v Dickman'. As you can see he merely restates that a duty of care was owed under the existing principles. A person who takes certain responsibility will owe a duty of care if the facts satisfy the criteria above.
I would agree with Eccles though that in practice companies with subsidiaries may want to review any existing insurance policies if this has been overlooked.
For the corporate veil to be pierced one needs to ask if the two separate companies are being treated as one for the purposes of liability. The answer here is no. The parent took on a duty of care through its (in)actions. Thus, the court recognised the parent company's separate legal personality and was not piercing the corporate veil to say the parent and the subsidiary were one. Perhaps further work in light of quite a few new cases, see here here and here, on this topic needs to seek a more accurate definition or categories of when the corporate veil will be pierced.
This is the first time an employee has successfully established liability to him from the parent company. Some people are claiming this is an attack on the separate legal personality principles, fundamental to company law. The case of Adams v Cape [1990] Ch 433 affirmed that a group of companies was not one legal entity. Each individual company in a group has its own legal personality. Whilst at first glance one may think this is open to abuse by having a rogue trader set up a number of companies to avoid liability this very rarely happens in practice. On the contrary allowing a group company to have different legal personality is beneficial for reasons such as diversification in business or due to geographical locations. Arcadia may be a good example of this. Furthermore, there are market forces that, at some level, prevent the abuse by parent companies of their subsidiaries, especially if they have similar creditors or suppliers.
Returning to the Chandler case the court found a duty of care was owed by the parent company to the employee of the subsidiary. The court of first instance had applied the test for how a duty of care is established, which is highlighted from the case of Caparo Industries v Dickman [1990] 2 AC 605 that a duty of care is owed if there is:
1) Reasonable to foresee harm
2) Proximity
3) Whether it is fair, just and reasonable for a duty of care to be owed
So, it may not come as quite a surprise that a duty of care was owed by the parent company to the employees of the subsidiary when one looks at this test. If the facts of the case demonstrate this three criteria then stringent rules of separate legal personality should not prevent a duty of care being owed. That would effectively, and excuse my limited knowledge of tort, go against basic principles that developed from Donoghue v Stevenson [1932] UKHL 100. To the effect it would basically imply if the parent company could not be liable then a manufacutrer of goods could not be liable to an eventual purchaser due to an intervening supplier of the goods after production.
And one must argue that the facts of the case do support a duty of care being owed. Here the parent company had superior knowledge of the health and safety of the particular industry; the parent company knew, or ought to have known that the subsidiaries system of work was unsafe; The parent knew or ought to have foreseen that the subsidiary or its employees would rely on its using the superior knowledge for the employees' protection and it was not necessary to show the parent company often interfered with the health and safety practices of the subsidiary. The court will look at the relationship between the companies more widely.
So is this piercing the corporate veil and ignoring the principle of separate legal personality for different companies in a group. The court was emphatic in rejecting such a notion. They note the question was simply whether the parent company owed a duty of care. An article written by Eccles suggest that this does pierce the corporate veil. But his arguments as to why seem to be merely restating the facts and recognised law in relation to duty of care, rather than stating why the veil has been pierced here.
He notes this pierces the corporate veil...'but only on the basis of an existing concept of assumption of responsibility - Caparo Industries v Dickman'. As you can see he merely restates that a duty of care was owed under the existing principles. A person who takes certain responsibility will owe a duty of care if the facts satisfy the criteria above.
I would agree with Eccles though that in practice companies with subsidiaries may want to review any existing insurance policies if this has been overlooked.
For the corporate veil to be pierced one needs to ask if the two separate companies are being treated as one for the purposes of liability. The answer here is no. The parent took on a duty of care through its (in)actions. Thus, the court recognised the parent company's separate legal personality and was not piercing the corporate veil to say the parent and the subsidiary were one. Perhaps further work in light of quite a few new cases, see here here and here, on this topic needs to seek a more accurate definition or categories of when the corporate veil will be pierced.
No comments:
Post a Comment