A recent case in the Court of Appeal has confirmed that a parent company can in some circumstances be liable to those affected by the activities of its subsidiaries. The case relates to the health and safety of an employee of a subsidiary company, but it may have wider implications where subsidiaries cause injury or loss to third parties.

It is well understood that companies have distinct legal personalities and that one company will not generally be liable for the actions of another, even if one is the wholly owned subsidiary of the other. This was shown, for example, in the 1991 case of Adams v Cape Industries plc, where the Court of Appeal refused to allow a US judgment against Cape to be enforced in the UK.

The question in that case was whether Cape should be treated as resident in the US on the basis that it had a subsidiary there, which marketed asbestos mined in South Africa by another subsidiary. The answer was a categorical "no" - the business of Cape's US subsidiary was its own business, not Cape's, and the subsidiary had no authority to contract on behalf of Cape.

In subsequent cases, however, Cape has not been so successful in using subsidiaries as a shield. In 2003 it paid out some £7.5m to settle actions following a decision in 2000 by the House of Lords (in Lubbe v Cape plc) to allow over 3000 South African claimants to bring proceedings against it in London.

In these cases, claims were made against Cape as a parent company which, knowing that exposure to asbestos was gravely injurious to health, failed to take adequate steps to ensure that proper working practices were followed and proper safety precautions observed throughout the group. Cape was said to have breached a duty of care which it owed to those working for its subsidiaries or living in the area of their operations.

The settlement meant that the substantive issue in Lubbe v Cape was not decided by the courts. But the question has now been addressed by the recent Court of Appeal decision in Chandler v Cape plc.

Mr Chandler contracted asbestosis as a result of a short period of employment over fifty years before with a UK subsidiary of Cape. As the subsidiary was no longer in existence, Mr Chandler sued Cape. It was not disputed that the subsidiary operated an unsafe system of work.

The Court of Appeal held that Cape itself had taken on a direct duty of care to its subsidiary's employees, in addition to the duty of care owed by the subsidiary, and that it had breached that duty. There were a number of factors which contributed to the Court's decision:

• Both Cape and its subsidiary were in the same business. The Court said "it is noteworthy that at no relevant point in time did Cape cease to be an operating company itself or merely hold the shares in its subsidiaries as if it were an investment holding company".
  
• Cape had, or ought to have had, superior knowledge of the dangers to health posed by asbestos.
  
• The subsidiary's system of work was unsafe, and Cape either knew or should have known this.
  
• Cape knew or ought to have foreseen that the subsidiary or its employees would rely on it using its superior knowledge for the employees' protection. For this purpose, it was not necessary to show that Cape was in the practice of intervening in the health and safety policies of the subsidiary. The Court would look at the relationship between the companies more widely, seeing, for example, whether the parent has a practice of intervening in the trading operations of the subsidiary.

The Court of Appeal rejected a contention that a parent company can only have a duty of care to a subsidiary's employees if it has absolute control of the subsidiary. It also rejected the suggestion that it could only take account of matters which might be described as not being normal incidents of the relationship between a parent and subsidiary company.

The 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. But it may not be limited to those circumstances. On the facts of this case, if the subsidiary's unsafe system of work had caused local people who were not employees to contract asbestosis, they may also have been able to sue Cape. More broadly, where a parent company has expert knowledge of particular risks associated with its business, whether risks to health, property and perhaps even financial risks, it should ensure that its knowledge is put to good use by the whole group in mitigating those risks.

Contact us

For further information, please contact:

Ian Lumsden
Partner
0131 228 7165
ian.lumsden@mms.co.uk

Danielle Harris
Professional Support Lawyer
020 7002 8542
danielle.harris@mms.co.uk

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This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.