Parents Beware!!! The Liability Of A Corporate Seller For Claims Against Its Subsidiary


David Few
Blandy & Blandy

The recent Court of Appeal decision in Chandler V Cape plc [2012] has important implications for those involved in corporate disposals and legal due diligence. In this case the Court found that a parent company can owe a duty of care to an employee of a subsidiary.  The claimant, Mr Chandler, had been an employee of Cape Building Products Limited (CPBL). During the course of his employment he was exposed to asbestos and later developed asbestosis. By the time of diagnosis CBPL had been dissolved and Mr Chandler therefore commenced proceedings against the parent company, Cape plc, and ultimately succeeded in claiming an award of damages.

The decision stands in contrast with the long established principle that the acts and liabilities of a company are its own and not its shareholders.  The Court of Appeal in Chandler found that a parent company could be liable if it can be established that the parent owed a duty of care to the claimant.

The Court found that a duty of care existed between the parent and the subsidiary’s employee because:

  1. The business of the parent and subsidiary were the same in the relevant respect;
  2. The parent had (or ought to have had) superior knowledge on some relevant aspect of the health and safety in the particular industry.
  3. The parent company knew (or ought to have known)  that the subsidiary’s system of work was unsafe; and
  4. The parent knew (or ought to have foreseen) that the subsidiary or its employees would rely in it using that superior knowledge for the employees’ protection.

From the conditions outlined above it is clear that the decision came short of replacing the principle that that the acts and liabilities of a company are its own and not its shareholders but did provide an alternative solution to attach liability to the parent company.

The judgment will raise concerns for any parent company relying on a group structure to protect itself from claims brought against a subsidiary. The Court examined the nature of the relationship between the parent and its subsidiary. Parent companies should therefore consider how they interact with their subsidiaries and whether such interaction could be construed in such a way that it could lead to the establishment of a duty of care.

In summary, the disposal of a subsidiary will not necessarily relieve the corporate seller from a duty of care which may exist. Buyers should ensure that, if it appears that a duty of care could exist, the apportionment of any liability is properly set out in the transaction documents. A buyer’s due diligence enquiries should focus on the relationship between the companies within a group structure and, in particular, the control exerted by a parent over its subsidiaries. Whilst this decision concerns a duty of care in relation to breaches of health and safety responsibilities  the principles set out in the Court judgment may also be applied to other areas, in particular environmental breaches.

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