In the landmark decision of Chandler v Cape plc  EWCA Civ 525, the Court of Appeal upheld a High Court decision that a parent company owed a direct duty of care towards an employee of one of its subsidiaries to ensure a safe system of work. This case has significantly expanded the potential liabilities of parent companies for their subsidiaries.
The claimant had been employed by asbestos manufacturer Cape Building Products Ltd (Cape Products), a wholly owned subsidiary of Cape plc, for 18 months between 1959 and 1962. In 2007, Chandler discovered that he had contracted asbestosis as a result of exposure to asbestos dust. However, by 2007, Cape Products no longer existed and its remaining employee liability insurance policies excluded asbestosis. In response, Chandler brought a negligence claim against Cape plc, alleging that it owed and had breached a duty of care.
The High Court decision
In 2011 the High Court ruled that the system of work at Cape Products was unsafe and, additionally, Cape plc owed, and had breached, a direct duty of care. The Court applied a three-stage test of assumption of responsibility:
1) the damage was foreseeable; 2) there was sufficient proximity between the claimant and Cape plc;3) and it was fair, just and reasonable for a duty of care to exist.
Among the key findings supporting this decision was that Cape plc had assumed responsibility for the health and safety of its employees and those of its subsidiaries with regard to asbestos. The High Court also found that Cape plc had known of Chandler's working conditions and was aware of the risks of exposure to asbestos.
The judgment on appeal
The Court of Appeal agreed with the High Court's findings, and held that in appropriate circumstances the parent company's actions may give rise to parent company liability for the health and safety of its subsidiary's employees. Those circumstances include where:
1) the business of the parent and subsidiary were in a relevant respect the same; 2) the parent had, or ought to have had, superior knowledge on some relevant aspects of health and safety in the particular industry;3) the parent company knew the subsidiary's system of work was unsafe, or ought to have known; 4) the parent had known or ought to have foreseen that the subsidiary or its employees would rely on the parent using that superior knowledge for the employee's protection.
Critically, for point (4), the court will look at the wider relationship between the two companies beyond health and safety. For example, if the parent company has a practice of intervening in the trading operations of its subsidiaries it may be liable. This is substantially broader than the High Court's findings and establishes a low threshold for inter-company liability.
Implications for the 'corporate veil'
In this decision, the Court of Appeal 'emphatically rejected' any suggestion that this case impacts on the concept of piercing the corporate veil. Instead, the issue concerned the relationship between the parent and its subsidiary and whether the parent’s actions resulted in a direct duty.
The decision is one of a series of recent judgments which have examined the English court's ability and willingness to pierce the veil. In Antonio Gramsci Shipping Corp v Stepanovs , Burton J found that the veil of incorporation should be pierced in order for liability to fall on the owners of companies formed for the perpetuation of fraud. He observed there was '…no good reason of principle or jurisprudence why the victim cannot enforce the agreement against both the puppet company and the puppeteer who, all the time, was pulling the strings. ...I accept... that the puppeteer can be made liable, as a party to the contract, but that as a matter of public policy he cannot enforce the contract'.
Burton J upheld his own decision in another first instance case of Alliance Bank JSC v Aquanta Corporation and Others . In contrast, in VTB Capital plc v Nutritek International Corp and Others  the Court of Appeal held that the decisions in Gramsci and Alliance Bank were based on the incorrect reading of historical authorities. In a judgment that represents an excellent distillation of case law regarding piercing the corporate veil, the court concluded that the decisions in Gramsci and Alliance Bank to allow the veil to be pierced and the puppeteer to be deemed to be a party to the contract to be incorrect.
The judgement in VTB Capital states that those decisions do not 'represent a principled development of the law that this court should adopt'. The court agreed that case law supported the idea of closely identifying the puppet and the puppeteer, and thereby justified the grant of a judicial remedy against the puppeteer on the basis of it being just and reasonable to do so.
However, to deem the puppeteer a party to a contract ignores both privity of contract, the principles of the corporate veil established in Salomon v A Salomon & Co. Ltd.  and most subsequent case law. These decisions have renewed debate over the scope of the corporate veil. Despite the Court of Appeal's disclaimer in Chandler and the decision in VTB Capital, parameters of this common law doctrine may be altering with far-reaching implications for those claiming redress against others who seek to protect themselves behind what was thought to be a relatively impregnable veil of incorporation.
The present position is that the courts still respect the principles in Salomon and do not wish to easily pierce the veil. Nevertheless, shareholders and directors will need to be wary of the reliability of the veil and the effectiveness of corporate ‘blockers'. Directors will also need to ensure that there is clear delineation between the activities and decisions of a parent and the operations of a subsidiary.
Implications for employer liabilities
While Chandler should be noted by group companies, the Court of Appeal stressed that the duty of care from the parent company to the employee of one of its subsidiaries does not arise automatically. Therefore, whether the parent company has assumed direct responsibility for the employees of its subsidiary will be established on a case-by-case analysis. This will need to be watched closely and parent companies are advised to review both their present and historic operating procedures as well as their terms of insurance.
Raymond L Sweigart is a partner, while Samuel J Pearse and Amina Adam are senior associates at the law firm Pillsbury