TRANSACTIONAL: Corporate/London: Looking Around the Corporate Veil by Hywel Jones

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International energy agreements frequently incorporate UK law in choice-of-law clauses. Legal principles developed by British courts thus have the potential to affect wide-ranging operations of energy-related companies, whether or not they are incorporated in the UK. From time to time, we present salient developments in jurisprudence involving UK law that might be incorporated into such agreements.

The corporate veil

As in many jurisdictions, UK companies benefit from the legal principle of “separate corporate personality” meaning that the acts and liabilities of a company are its own and not those of its shareholders. In a group of companies, each subsidiary is separate from its parent and the parent cannot be held responsible for the acts or liabilities of its subsidiaries by reason of the corporate relationship alone. This “corporate veil” can only be “pierced” in limited circumstances such as where fraud or illegality is established or an agency relationship exists or where statute expressly provides for it.

Chandler v Cape plc

It has now been established by the UK Court of Appeal in Chandler v Cape plc that a parent company can be held directly culpable for an act or omission of its subsidiary should it be deemed to have assumed a duty of care on the basis of common law negligence. Although this is not technically piercing the corporate veil, the effect is certainly the same.

This recent case concerned a parent’s liability to a former employee for asbestosis contracted while working for its subsidiary. However, it clearly will have broader implications for other tortuous claims, including environmental and pollution claims (such as liabilities for contamination resulting from the activities of its subsidiary), particularly in high risk industries, such as the oil and gas industry.

Background

First, some important background facts:

  • Cape was involved in the production of asbestos in the UK.
     
  • In 1945, Cape leased additional factory space in Uxbridge from CBP Ltd.
     
  • By 1953, Cape had acquired the lessor, CBP, and began integrating the company into its group.
     
  • In March 1956, the board of Cape gave its approval to a separate administration at Uxbridge for dealing with all approved aspects of the management, production and sales of the asbestos board “in accordance with company policy.”
     
  • At all material times there were directors of Cape on the board of CBP and most of the board meetings were held at Cape’s head offices.
     
  • In July 1956, Cape transferred its asbestos business at Uxbridge to CBP and from then on CBP handled its own sales and dealings with third parties.
     
  • The Cape board took an interest in issues relating to the management of its subsidiaries (such as discussing action proposed to solve a production difficulty at the Uxbridge factory).
     
  • Cape shared technical know-how and product development with CBP.
     
  • Cape employed a “group chief chemist” whose responsibility extended to health and safety issues raised by research and development.
     
  • CBP employed its own works doctor and had its own works safety committee on which workers were represented.
     
  • Cape appointed a group medical adviser located at its Barking plant and was engaged in research on health and safety issues for those involved in the production of asbestos.
     
  • From 1945 Cape had kept statistics for asbestosis, lung cancer, and mesothelioma among employees or former employees at Uxbridge.

The claim

Mr. Chandler had contracted asbestosis in 2007 as a result of exposure to asbestos during his employment with CBP at its Uxbridge factory from 1959 to 1962.

CBP had been dissolved and its employers’ liability insurance did not cover asbestosis anyway. Chandler brought a claim against Cape on the basis that Cape should be held jointly and severally liable with CBP for damages as a consequence of its negligence.

To succeed in an action for negligence at common law a claimant must establish that the defendant owed a duty to the claimant; the defendant breached that duty; and that breach caused the claimant to suffer recoverable loss.

There is no general duty of care to prevent third parties from causing damage to another. However, there are exceptions including where a special relationship between the defendant and the claimant can be shown, based on an assumption of responsibility by the defendant. Whether a party has “assumed responsibility” is a question of law and it is not necessary for a court to find that the relevant party has voluntarily assumed responsibility. This is what was at issue in the Chandler case.

The decision

The High Court ruled that Cape was liable and awarded Mr. Chandler damages. Cape appealed and the Court of Appeal recently upheld the High Court's original ruling, deciding that in certain circumstances a parent company is fully responsible for the health and safety of the employees of a subsidiary, and that this liability will survive the liquidation of the subsidiary.

The Court attached particular importance to the fact that Cape had superior knowledge to CBP about the nature and management of asbestos. Whilst it was not found that Cape controlled CBP’s health and safety policy, it was found that it did on other matters such as the nature of the products manufactured and the requirement of approval for capital expenditure. It was held that Cape was in breach of its duty by failing to advise CBP on what steps it had to take to provide a safe system of work and to ensure that those steps were taken.

So when will a direct duty of care arise? The answer: If --

(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 and 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 it using that superior knowledge for the employees’ protection.

In relation to (2), whether the parent company had “superior knowledge” will likely be a contentious issue:

  • A court is likely to accept superior knowledge where the subsidiary is founded by the parent company, but may be reluctant to do so where the subsidiary initially existed independently of the parent and was subsequently acquired.
     
  • It is unlikely to impact on private equity investors because they are unlikely to be regarded as having superior knowledge.
     
  • In order for the case to be relied upon the parent company will have to have owned the subsidiary contemporaneously with the exposure.

In relation to (4) the court said that the requirement will be satisfied where the parent has a practice of intervening in the trading operations of the subsidiary. However, if there is any degree to which a parent has some relevant or superior knowledge of health and safety, coupled with knowledge (ether express or implied) that a subsidiary's system of work is unsafe, and that it is foreseeable that the subsidiary or its employees would rely on the parent's superior knowledge, then it is not necessary to show that the parent is intervening in the running of the subsidiary.

The consequences of the decision

So what should you do?

Governance review

Typically, a robust governance system would include: procedures to formulate and implement group-wide policies; line management and reporting lines (to ensure and evidence that group-wide policies and procedures are followed); training; procedures for periodic audits and follow-up actions.

The benefits of a system such as this being implemented group-wide are obvious. However, parent companies should not go too far so as to control and direct, or be seen to control and direct, the day-to-day management of health and safety, employment, and environmental affairs of its subsidiaries as this could risk the parent assuming liability.

Therefore, things to review and consider will include:

  • Responsibility: Who has ultimate responsibility for the management of health and safety, employment, and environmental affairs?
     
  • Boards of directors: Are there individuals who are directors of the parent and of a subsidiary? Is it clear that if they take decisions on behalf of the subsidiary, that they are doing so in their capacity as directors of that entity?
     
  • Taking decisions: How, by whom, and where are these taken? By the parent company board, by a subsidiary’s board, or otherwise by delegated committees? How are decisions documented and disseminated?
     
  • Policies and procedures: How, by whom, and where are policies and procedures determined? Are they specifically determined by the subsidiaries working only with reference to the parent or are they predominantly influenced by group-wide issues or decisions?
     
  • Training: How, by whom, and where is training conducted? Does the parent or subsidiary carry out health and safety training? Is it specific to the subsidiary or is it group-wide?
     
  • Audits: How are risk assessments and audits conducted? Does the parent or do subsidiaries control the content and form of risk assessments and who ultimately reviews these and determines when and how health and safety audits are done?
     
  • Internal reporting: What is the nature and scope of reporting and other communications from subsidiaries to the parent? To what extent are these protected by legal privilege in the relevant jurisdictions?

While it may be possible to insulate the parent from liability, the benefits of will need to be weighed up against the desirability of reduced parent influence in terms of lost efficiency and increased costs.

Insurance audit

Parent companies should review their existing insurances to ensure that their employers’ liability cover does in fact cover any potential liability. Other issues to consider are:

  • Whether there is sufficient insurance cover in place?
     
  • Whether the parent carries a large deductible?
     
  • If there are existing employee health and safety claims against your subsidiaries, will these cases give rise to a “circumstance,” which might give rise to a claim in the parent, triggering claims notification provisions in insurance policies?
     
  • Will existing claims raise any potential non-disclosure issues for the parent when renewing policies pending resolution of the claim - should the claim be disclosed to insurers?
     
  • Will there be an adverse impact on premiums?

Buying and selling businesses

If you are selling a company, then there remains with the seller a latent risk that employees (or former employees) of the sold company will bring a claim against the seller. There is also a risk that if an employee sues the sold company, that the sold company could also bring a contribution claim against the seller relying upon the same principles as this case. So, if the seller has negotiated a “clean break” with the buyer on the sale of the subsidiary, then the seller should ensure the buyer indemnity covers all these potential liabilities.

If you are buying a company, particularly one in a high risk industry, then ensure that your diligence, warranties, and indemnities extend to liabilities that the target company could incur with regard to claims relating to the businesses of former subsidiaries (including companies remaining in the seller’s group).

Joint ventures

When establishing a new JV or in deciding how to interact with an existing one, shareholders should carefully consider the advantages and disadvantages of any approach to guidance and/or intervention in relation to health and safety, employment, and environmental matters. Also, shareholders should carefully consider whether the JV should engage its own staff or rely on secondees from shareholders.

Conclusion

Chandler is an important development in the law and will have application to other tortuous claims, including environmental and pollution claims. The general absence of insurance cover for all environmental liabilities could, for example, mean that the courts are more willing to consider environmental claims against parent companies to ensure recourse for parties injured as a consequence of an incident.

Risks are sometimes higher in countries where there is weaker regulatory oversight. Multinationals could be at risk from claims concerning the businesses of its subsidiaries operating in these countries. It is certainly possible that a duty of care could be established between a parent company and its foreign subsidiaries.


  Hywel Jones
  London
  +44 20 7551 7569
  hjones@kslaw.com

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Published In: Business Organization Updates, Business Torts Updates, General Business Updates, Energy & Utilities Updates, International Trade Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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