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U.K. Recognizes Direct Duties for Parent Companies in Asbestos Case

This week I'm posting a series of updates on recent developments in human rights cases around the globe. Wednesday I wrote about a Dutch court awarding damages to a Palestinian doctor who survived torture in Libya, yesterday I highlighted a criminal complaint filed against Nestlé for complicity in the murder of a union leader, and today I conclude this series with an update on corporate liability in the U.K. . . .

One of the most interesting and exciting recent advances in corporate liability has come out of the U.K. courts in an asbestosis case.  In Chandler v. Cape plc, the England and Wales Court of Appeals decided last month that Cape plc could be liable for failing in its duty of care to exercise proper supervision of health and safety conditions for employees of its subsidiary.

This is the latest case to affirm the principle that courts can hold parent companies responsible for the actions or omissions of their subsidiaries in a variety of circumstances.  By incorporating subsidiaries, parent companies create a “corporate veil” that cannot usually be “pierced” when the subsidiaries incur tort or tax liabilities.  The corporate form allows parents to claim that their subsidiaries are solely responsible, and they do not share in that responsibility.  Courts will normally pierce the corporate veil only when there’s evidence that the subsidiary is a sham, created only to allow a parent company to fraudulently avoid responsibility for wrongful acts. 

However, as U.S. and U.K. courts have made clear, when the subsidiary is acting on behalf of the parent, or – as in the Cape case – when the parent has direct responsbility for the subsidiary, the parent can be held responsible even if the subsidiary’s business is legitimate.

The judgment in Cape is particularly important because of the clarity with which it states this principle.  In finding that the parent company took on a direct duty to its subsidiaries’ employees to prevent unsafe production and handling of asbestos, the court ruled:

. . . the law may impose on a parent company responsibility for the health and safety of its subsidiary's employees. Those circumstances include a situation where, as in the present case, (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.

In other words, where the parent company is the relevant source of expertise, it knows that its subsidiaries’ operations are unsafe, and it’s clear that the subsidiary would have been relying on the parent – a fact which can be shown by the parent’s practice of intervening in the subsidiary’s business practices – then the parent is responsible for the subsidiary’s health and safety violations.

This principle is relevant in many of ERI’s cases.  In Sahu v. Union Carbide, for example, the plaintiffs claim that the Union Carbide was intimately involved in planning and overseeing the environmental practices at its subsidiary’s chemical plant in Bhopal, India.  Union Carbide provided the technical know-how, the designs, and even the engineering experts, and it had a history of dictating the subsidiary’s important trading decisions.  Under the Cape rule, Union Carbide would likely be liable for its subsidiary’s tragic failure to prevent the Bhopal chemical disaster and the subsequent posioning of local aquifers.

Edited July 9, 2013. The original version of this post erroneously identified Cape's subsidiary as South African. While the post refers to the legal doctrine of veil piercing, this doctrine was not actually invoked in this particular judgment.