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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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.