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The impact of Chandler v Cape plc on corporate holding structures

The impact of Chandler v Cape plc on corporate holding structures

In October 2011 we reported on the England and Wales High Court decision in Chandler v Cape plc. The Court of Appeal has now upheld the High Court decision confirming that the holding company owes a direct duty of care to the employees of its subsidiary.

Facts
To briefly recapture the facts of the case, the claimant was an employee of Cape Building Products Ltd (Cape Products) in 1959 and 1961/62 at a site which manufactured asbestos boards. During the course of his work, the claimant was exposed to asbestos dust which was produced during the manufacture of the boards and contracted asbestosis. His exposure had been caused by negligence and constituted a breach of statutory duty on the part of Cape Products.

At the relevant time, Cape Products was a wholly-owned subsidiary of Cape plc and one of many subsidiary companies within the Cape group which had as its core business the production of asbestos-based products. Cape Products had no policy of insurance to indemnify it against claims for damages for asbestosis and had ceased to exist at the time of the claim.

High Court decision
The High Court held that Cape plc owed a direct duty of care to the employees of its subsidiary because it assumed overall responsibility for the relevant matters in relation to those employees. The judge based his decision on the three-stage test established in Caparo Industries v Dickman5 stating that Cape plc:

• had actual knowledge of the Mr Chandler’s working conditions;
• should have foreseen the risk of injury to Mr Chandler;
• employed a scientific officer and a medical officer who were responsible for health and safety issues relating to all employees within the Cape group;
• dictated policy in relation to health and safety issues; and • retained overall responsibility for ensuring that its own employees and those of its subsidiaries were not exposed to risk of harm through exposure to asbestos.

Court of Appeal decision
The Court of Appeal confirmed the decision of the High Court holding that responsibility of a parent company for the health and safety of its subsidiary’s employees may be imposed 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.

These points reflect the findings of the High Court. However the decision of Arden LJ seems to be broader than the High Court decision. She states that, for the purposes of element (4), it is not necessary to show that the parent is “in the practice of intervening” in the subsidiary’s health and safety policies. Rather, courts will look at the group structure more widely and may find element (4) 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”.

Comment
This is one of the first cases in which a parent company was held to owe a direct duty of care to, and be liable for, a subsidiary’s employees. It is not a case of “piercing the corporate veil” and the decision to impose a direct duty of care on the parent company was not based on the parent company’s control of its subsidiary. Rather, it was the assumption of responsibility by the parent company over the relevant affairs of its subsidiary that forms the basis of the court’s judgment.

The case specifically relates to the parent company’s responsibility for health and safety matters of its subsidiary’s employees. However, the way the Court of Appeal phrased its decision in relation to element (4) above suggests that it may have wider implications for parent company liability: To prove this element it will be sufficient to show that the parent company has a practice of intervening in other group-wide matters, matters entirely unrelated to health and safety issues.

The case also establishes that such a liability may be imposed on a parent company a long time after the relevant subsidiary ceased to exist. In the context of corporate transactions, this will have to be taken into account when conducting due diligence on a target group of companies.

Marlies Braun

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