We all know that a company has a separate legal personality and that only in very exceptional cases will the courts be prepared to pierce the corporate veil and look behind it to its owners and managers so as to make someone personally liable. It is also true that English law imposes no general duty of care on its citizens to prevent harm to others in the absence of circumstances in which the law deems it necessary, fair, just and reasonable to impose such liability.
Directors of UK companies benefit significantly from these two important principles since, as a result, they generally do not owe duties of care either to company’s shareholders or to its potential investors¹. Only in those cases where the directors are taken voluntarily to have assumed responsibility to shareholders, investors or others do they run a risk under English common law of being found to owe a duty of care².
Liability of a Parent Company
A decision of the Court of Appeal last year in the case of Chandler and Cape Plc sheds some interesting new light on this important area of case law for directors. Indeed the facts of Chandler and Cape are interesting in their own right since the question for consideration was whether a parent company could be found liable to an employee of one of its subsidiaries. Mr Chandler was an employee of a subsidiary of a large public company, Cape PLC when he contracted asbestosis. The subsidiary was later wound up.
“Attachment of Responsibility”
In delivering the judgment of the Court, Lady Justice Arden reviewed the relevant evidence and case law. In doing so she pointed out that the phrase “assumption of responsibility” was not strictly the right label because it was not necessary to show that the responsibility had been voluntarily assumed by the potential defendant. Instead, she thought the term “attachment of responsibility” was more appropriate. In reaching her conclusion that the parent company could be liable directly to the employee of its subsidiary she was at pains to point out that this was not a case of piercing the corporate veil. Instead it was a case where attachment of responsibility was appropriate. It is, I think, worth quoting from her judgment:
“In summary, this case demonstrates that in appropriate circumstances 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:
- The business of the parent and subsidiary are in a relevant respect the same
- The parent 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 and 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 its using that superior knowledge for the employee’s protection…”
The Chandler and Cape case serves as a reminder of the Courts’ willingness, on the right facts, to attach legal responsibility to prevent harm to others beyond the scope of the employer/employee relationship. In this case, that willingness resulted in the parent company being liable to an employee of a subsidiary but there is no reason in principle why the same arguments might not also apply to directors of a company in appropriate circumstances. It’s worth remembering that Section 37 of the Health and Safety at Work Act makes it a criminal offence for directors of a company to be associated with a breach by the company of the Health and Safety legislation where such association constitutes consent, connivance or neglect. It’s not perhaps such a big leap from a statutorily imposed criminal standard of care to a civil one which might create an actionable claim against a director on the right facts. Interestingly the Courts have also helpfully shed some light on the meaning of the words; consent, connivance or neglect but that will have to be the subject of another blog!
A note to end on
In the many months since I started my blog I have, for good reason, steered away from talking about DARCstar (Directors’ All risks Cover) since it is not my role as blogger to promote specific products whether of Willis or otherwise. Nonetheless I hope you will forgive me for breaking that rule to announce that since the launch two years ago there are now in excess of 120 DARCstar placements in the insurance market. I mention this to make essentially the same point, as I sought to make in my piece on Broken Cover and related blogs, that there is genuine debate going on as to the most appropriate from of D&O cover and now perhaps for the first time real choices available to buyers as to the form and type of cover. I would never claim that we have a corner on all the solutions to an ever changing and complex landscape of liability and coverage issues but I am delighted to have at least made a contribution to the debate.
¹ Caparo Industries plc v Dickman 
² Natural Life Health Foods Ltd. and another  B.C.L.C. 288