Asbestosis: Landmark decision affecting parent company liabilities

In Chandler v Cape plc (25 April 2012) the Court of Appeal held a parent company directly liable to an employee of a defunct subsidiary for asbestosis resulting from exposure when he worked for the subsidiary more than 50 years ago.

By holding that the parent owed a duty of care, the Court of Appeal allowed the claimant to circumvent the principle that the “corporate veil” protects parent companies from claims arising from their subsidiaries’ activities.

This decision could significantly undermine the protection from civil claims afforded to parent companies by the corporate veil.

Background and first instance decision

Mr Chandler worked for Cape Products Limited (CPL), a subsidiary of Cape plc (Cape). During his employment he was exposed to asbestos and decades later developed asbestosis. CPL had been dissolved in the meantime and had no applicable employer’s liability insurance. Mr Chandler brought his claim against Cape, the extant parent company.

Cape invoked the corporate veil, asserting it was not liable for its subsidiary’s alleged negligence. Mr Chandler argued that Cape owed him a direct duty of care because it had assumed responsibility for the safety of CPL’s employees. Cape had employed a medical adviser who had visited Mr Chandler’s place of work.

He had corresponded with HM Inspector of Factories regarding another employee who had developed asbestosis whilst working for CPL. He had also investigated the link between asbestos and lung disease, becoming an international authority. There was also evidence that Cape had employed a group medical adviser since at least 1946 and kept statistics of asbestos related diseases amongst all Group employees, including CPL’s. Cape also intervened in CPL’s methods of manufacture.

The first instance court accepted these arguments, finding that Cape owed a separate duty of care to CPL’s employees.

Court of Appeal decision

The Court of Appeal dismissed Cape’s appeal, agreeing with the trial judge that Cape had assumed responsibility for Mr Chandler’s safety. In determining whether a duty of care arose, the three part test in Caparo v Dickman should be applied. A duty would arise when:

• the damage caused to the employee is foreseeable by the parent company;
• there is “proximity” of relationship between the parent and the subsidiary’s employee;
• it is fair, just and reasonable for the court to impose a duty of care on the parent.

However, the Court of Appeal’s judgment goes beyond the specific facts of the case and sets out general factors it considered relevant to whether a duty of care should be imposed on a parent company. Those factors are whether:

• the business of the parent and the subsidiary are in a relevant respect the same;
• the parent company has, or ought to have, superior knowledge of 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;
• 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.

It is the last factor which hides the sting in the tail. In her leading judgment Lady Justice Arden explained that to establish a duty it was not necessary to show that a parent company was in the practice of intervening in the subsidiary’s health and safety policies. It could be sufficient if the parent had a practice of intervening in the subsidiary’s business in other respects, for example, production and funding issues.

This passage significantly extends the principle beyond the facts of Chandler v Cape where the appeal and first instance courts had relied on clear evidence of involvement in health and safety issues to impose a duty of care on Cape.

Implications

Where the Court of Appeal’s four factors are satisfied, there is a clear potential for claimants to target a parent company and establish a direct duty of care, circumventing the protection of the corporate veil and steps which may have been taken to protect corporate groups by dissolving dormant companies with potential liabilities.

“Forum shopping” claimants might argue that because a UK domiciled parent took an interest in the commercial affairs of an overseas subsidiary, the parent owed a duty to the claimant in respect of the subsidiary.

The duty that may be imposed on a parent company to the employee of a subsidiary is a tortious duty of care. The parent is not being held liable as an employer, so an existing employer’s liability policy would not respond in this situation.

Insurance options for parent companies against whom such a claim is brought could include public liability insurance or general commercial liability cover. There is, however, uncertainty as to whether these policies will exist or respond:

• unlike employer’s liability policies they are not a compulsory insurance so may not have been purchased;
• some public liability policies (but not all) were written on a losses occurring basis;
• more recent public liability policies contain an asbestos exclusion.

If a parent in an industry where there is a high risk of such claims has subsidiaries that have been dissolved and which do not have employer’s liability cover then, if the parent does not have insurance which will respond, it may wish to consider purchasing additional cover.

Group companies may also wish to review their policies and procedures to protect against the risk of creating parent company liability.

Peter Anson and Alison Moss are partners and George Mortimer is an associate in the insurance team at DLA Piper

"The duty that may be imposed on a parent company to the employee of a subsidiary is a tortious duty of care"

DLA Piper

Alison Moss

George Mortimer

Peter Anson