Parent Companies and the Duty of Care

Corporate personality is granted to a company via statute (namely s 16(2) of the CA 2006) and so the issue of when (and indeed whether) the courts should set aside a company’s corporate personality has proven to be a controversial and difficult subject. The leading case, Prest v Petrodel Resources Ltd, has provided clarification, but it has done this by restricting those instances where the courts can pierce the veil. Indeed, in that case, Lord Neuberger even reclassified many prior ‘veil-piercing’ cases and stated in the majority of cases the veil would not need to be pierced at all as a similar result could be achieved by applying conventional legal principles. One such conventional legal principle is the duty of care, and in the recent case of Ogale Community v Royal Dutch Shell plc, the key issue was whether the parent company could be liable for damage caused by the actions of its subsidiary. Before looking at this case, it is worth briefly covering the case that first established that a parent company can owe a duty of care to an employee of its subsidiary, namely Chandler v Cape Industries plc.

Chandler v Cape Industries plc

Chandler was, for periods between April 1959 to February 1962, an employee of Cape Building Products Ltd (CBP), a subsidiary of Cape plc. In 2007, Chandler discovered that he had contracted asbestosis as a result of being exposed to asbestos whilst working for CBP. He sought to obtain compensation, but CBP had been dissolved many years before and, during Chandler’s period of employment, CBP had no insurance policy in place which would indemnify Chandler for his loss. Accordingly, Chandler commenced proceedings against the parent, Cape plc.

Arden LJ stated that a parent company could be liable for injuries sustained by an employee of its subsidiary if the parent owed a duty of care to the employee, which it then breached. She went on to list several factors that might result in such a duty being imposed, namely:

  • the businesses of the parent and subsidiary are in a relevant respect the same;
  • the parent has, or ought to have, superior knowledge on some relevant aspect of health and safety in the particular industry;
  • the subsidiary’s system of work is unsafe as the parent company knew, or ought to have known; and
  • the parent knew or ought to have foreseen that the subsidiary or its employees would rely on it using that superior knowledge for the employees’ protection.

In such a case, the parent would have assumed a responsibility towards the employees of the subsidiary and so liability could be imposed upon it. The Court held that the above circumstances were present here and so Cape plc had assumed a responsibility to Chandler, and so it was ordered to pay him damages. The important point to note that liability was established by holding that Cape owed a duty to Chandler, which it had breached. The Court emphatically rejected any suggestion that liability was imposed upon Cape by piercing the corporate veil.

A number of subsequent cases have involved similar facts to Chandler and all have followed the approach in Chandler (see Lungowe, Unilever, and Thompson). However, in none of these cases was the claimant able to establish that the parent company owed him a duty of care, thereby indicating that establishing a duty is no easy feat. The same is true of the latest case, namely Ogale Community v Royal Dutch Shell plc, but this case did not involve an employee who had suffered loss. Instead, it involved persons who were affected by pollution caused by a subsidiary’s activities.

Ogale Community v Royal Dutch Shell plc

Shell Petroleum Development Company of Nigeria Ltd (‘SPDC’) was a subsidiary of Royal Dutch Shell plc (‘RDS’). SPDC was incorporated in Nigeria, whereas RDS was incorporated in the UK. Two claims were brought (representing around 42,500 claimants in total) alleging that SPDC’s activities in Nigeria had caused widespread pollution to those areas of Nigeria where the claimants lived. Given the close relationship between Shell and the Nigerian government, the claimants argued that they would never get justice in a Nigerian court if they sued SPDC. Accordingly, they decided to commence proceedings against RDS in the UK’s High Court. At first instance, their claim failed, so they appealed to the Court of Appeal

By a 2:1 decision, the appeal was dismissed. Sir Geoffrey Vos and Simon LJ held that RDS did not have sufficient control over the activities of SPDC and there lacked sufficient proximity (proximity is one of the three factors required to establish a duty of care, as set out in Caparo Industries plc v Dickman). However, Sales LJ dissenting, stated that he would have allowed the appeal, inter alia, on the ground that he felt that RDS and SPDC exercised joint control over the pipeline that caused the pollution, and this established sufficient proximity.

The claimants have stated that they will seek permission to appeal to the Supreme Court.

Conclusion

Concerns were expressed following Chandler that it could result in a swathe of cases imposing liability on parent companies for the actions of their subsidiaries, which could result in a notable weakening of a company’s corporate personality (even if the veil was not actually being pierced). To date, this has not occurred. There have only been a handful of cases where the Chandler principle has been relied on and in none of those cases was it successful. It is clear that establishing a duty in such circumstances is not easy. However, it is interesting to see that the Chandler principle is being pleaded to establish a duty in cases other than those involving an injured employee (both Ogale and Lungowe involved environmental pollution). Should the claimants in Ogale be granted permission to appeal, it will be interesting to see what the Supreme Court makes of the principle established in Chandler. It is highly unlikely that the Supreme Court would overrule Chandler as it is arguable that the Chandler is an example of what was later stated by the Supreme Court in Prest (i.e. that liability can be imposed upon a parent company using conventional legal principles). It is more likely that the Supreme Court will seek to establish more clear principles regarding when a duty will arise.

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