Parent Companies and the Duty of Care

One issue that repeatedly arises in corporate law discourse is the extent to which a parent company can be liable for the acts or omissions of its subsidiary. As each company in a corporate group has its own corporate personality, the general response is that parent companies are not liable for the acts/omissions of their subsidiaries. Liability could be imposed on a parent company if the corporate veil of the subsidiary can be pierced, but since the Supreme Court decision of Prest v Petrodel Resources Ltd narrowed the instances in which the corporate veil can be lifted (and narrowed the definition of what constitutes a lifting of the veil),this will be very difficult to establish in practice.

An alternative method is to establish that a parent company owes a duty of care to those affected by the relevant acts/omissions of the subsidiary. This was argued successfully in Chandler v Cape plc, and the High Court has recently revisited this method in His Royal Highness Okpabi v Royal Dutch Shell plc.

Facts

Shell Petroleum Development Co of Nigeria Ltd (‘SPDC’) was a Nigerian-based company that conducted onshore oil operations in Nigeria. SPDC was a subsidiary of Royal Dutch Shell plc (‘RDS’), a company based in the UK. It was alleged that oil spills from SPDC’s pipelines had caused ‘serious and ongoing pollution and environmental damage’ to wide areas of the Niger Delta and the waters of the Delta itself. The defendants did not dispute this (although they did attribute other causes to the damaged pipelines, such as locals damaging the pipes to steal the oil).

The claimants (of which there were around 42,500) commenced proceedings against both SPDC and RDS but, for our purposes, it is the claim against RDS which is of interest. The claimants argued, inter alia, that RDS owed a duty of care to those persons affected by the activities of SPDC, and therefore it should be liable for the damage caused.

Decision

The claimants’ case failed and the High Court held that RDS did not owe them a duty of care. Fraser J stated that the starting point was the three-part test in Caparo Industries plc v Dickman, namely forseeability, proximity, and reasonableness.Fraser J stated, at paras 114-5) that the claimants would have difficulty establishing the second and third parts of the test.

Fraser J also examined the various authorities, notably Chandler. In Chandler, Arden LJ identified four factors that could indicate the existence of a duty of care, namely:

(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.

Fraser J stated that, when approaching these four factors, a two-stage approach is to be adopted, namely ‘[t]he first is whether the parent company is better placed than the subsidiary. The second is, if the finding is that the parent company is better placed, whether it is fair to infer that the subsidiary will rely upon the parent.’ He went on to state that the four factors were:

descriptive rather than exhaustive, the presence of some, or all, of those factors, would bring any particular case more closely within the scope of a duty of care owed by a parent company, the existence of which has already been recognised by the Court of Appeal. The higher the number of those four factors that are present, the more likely that will be.

Fraser J held (at para 116) that none of the four factors identified by Arden LJ were present here. He also stated that ‘a duty of care is more likely to be found in respect of employees, a defined class of persons, rather than others not employed who are affected by the acts or omissions of the subsidiary.’

Comment

This case provides additional (albeit limited) guidance on the factors to be applied when determining whether a parent owes a duty of care to persons affected by the actions/omissions of its subsidiaries. Clearly, cases in this area are highly fact-specific and the relationship between RDS and SPDC was of notable importance. This is only a first instance decision and the claimants have indicated that they intend to appeal. This blog post will be updated if permission to appeal is granted and if an appeal decision is handed down.

Campbell v Gordon [2016] UKSC 38.

Today the Supreme Court handed down judgment in the case of Campbell v Gordon (a video of Lord Carnwath’s lead judgment can be found here). Gordon was the sole director of Peter Gordon Joiners Ltd (‘the company’). Campbell, an employee of the company, injured himself whilst working with an electric saw. Whilst the company did have employers’ liability issuance, the policy in question excluded any claims arising from the use of ‘woodworking machinery’ powered by electricity. Accordingly, no claim could be made. The company’s failure to have in place appropriate insurance was a breach of s 1(1) of the Employers’ Liability (Compulsory Insurance) Act 1969.

The company went into liquidation in 2009, so Campbell could not commence proceedings against it. Instead, he argued that Gordon should be personally liable for his failure to obtain appropriate insurance cover. At first instance, Campbell’s claim succeeded, but was later dismissed by the Inner House. Campbell appealed to the Supreme Court.

Campbell’s appeal was dismissed by a majority of three to two. Lord Carnwath, whose leading judgment Lords Mance and Reed agreed with, started by noting that a breach of s 1(1) was, according to s 5, a criminal offence, but did not provide for any civil liability. He went on to state that ‘[t]he language of s 5 ‘was deliberately chosen and is intended to mean what it says. The formula is specifically directed at criminal liability.’ Accordingly, it did not appear that civil liability could be imposed upon Gordon. However, Lord Carnwath also noted that authority did exist for the imposition of civil liability in cases where statute imposed criminal liability only. In such cases, the starting point is to look at the statutory obligation itself and who it intends to make liable. It was clear that the obligation in s 1(1) was placed on the company. Lord Carnwath stated ‘there is no suggestion that … a person can be made indirectly liable for breach of an obligation imposed by statute on someone else. It is no different where the obligation is imposed on a company. There is no basis in the case law for looking through the corporate veil to the directors or other individuals through whom the company acts. That can only be done if expressly or impliedly justified by the statute.’ As the 1969 Act imposes direct responsibility upon the employer only, no civil liability fell on Gordon.

The dissenting judgments of Lord Toulson and Lady Hale are worth noting. Lord Toulson stated that the purpose of the 1969 Act was to protect the employees ‘in the event of suffering an illness or injury arising out of their employment for which the company is liable, of the liability being covered by insurance up to a specified sum’ and that ‘the pool of those bearing legal responsibility for seeing that such protection is in place is not confined to the company itself. It extends to the company’s relevant officer or officers.’ Lady Hale was of the opinion that it was the intention of Parliament that breach of s 1(1) of the 1969 Act should give rise to civil liability towards the injured employee. She stated that the purpose of the 1969 Act was to ‘protect a very specific class of people, namely employees who might be injured by the employer’s breach of duty (whether arising by statute or at common law). The protection intended was that they should be compensated for their injuries even if, for whatever reason, the employer was unable to do so. Failure to insure means that the employee is denied the very thing that the legislation is intended to provide for him.’

This case is ultimately one about statutory interpretation. It is clear that, in interpreting the 1969 Act, the majority adopted a very different approach from Lord Toulson and Lady Hale. The majority adopted a literal approach to interpreting the 1969 Act, whereas Lord Toulson and Lady Hale adopted a much more purposive approach (Lord Toulson referred to it as a ‘functional’ approach) that focussed on the context of the Act. Lord Toulson did not deny the validity of a literal interpretation, but felt that ‘[t]he present context is legislation for the protection of a vulnerable group, a company’s employees. In that context I regard the functional approach as more appropriate.’