When is a Subsidiary's Negligence the Parent Company's Problem?
| Author | Nic Wilson |
| Position | LLB(Hons)/BA, University of Canterbury |
| Pages | 161-195 |
WHEN IS A SUBSIDIARY’S NEGLIGENCE
THE PARENT COMPANY’S PROBLEM?
N W*
Abstract
Recognisin g a duty of care on a pare nt company for the act s or omission s of its
subsidiary poses the dicult issue of accommodating principles of limited liability and
separate corp orate personality within th e paradigm of traditional tor t principles. ese
diculties m ean the law is unsettle d. Recent New Zealand and Un ited Kingdom appellate
decisions c hallenge both the concept ual basis for any duty of care as w ell as the instances
where such a dut y of care may or may not be ow ed. is pape r clarifies whe re a parent
company may owe a dut y of care and on what b asis. It argue s something mo re than a
parent company’s ca pacity to cont rol its subsid iary is requi red to give rise to a d uty.
A parent company’s du ty of care should b e recognised on t raditional du ty princip les
governing wh ere A owes C a duty to p revent harm ca used by B. is p aper identifie s
four broad situa tions in which a parent company m ay owe a duty of care for the acts or
omissions of i ts subsidiary. It con cludes by consider ing the wider applicati ons of a parent
company’s duty of ca re, and the implications for the exi sting approach to recognisi ng a
director’s duty of care for negligent misstatements.
I. Introduction
Over the las t two decades, c ourts h ave recogni sed a duty of ca re on parent
companies for t he negligent a ctions of thei r subsidia ries. The Cou rt of Appea l
considered th is duty for t he first ti me in New Zea land in James Ha rdie Industr ies
plc v White.1 The Unit ed Kingdom Supreme Cour t recently became t he first superior
court to c onsider the issue,2 and i s set do so again.3
2 Lungowe v Vedanta Resources plc [2019] UKSC 20, [201 9] 2 WLR 1051 [Lun gowe].
3 Paul Carsten a nd Libby George “UK S upreme Court to hea r Nigerians’ ca se for pursuing Shel l
spill cla im in Engl and” (24 July 201 9) Reuters .
* LLB(Hon s)/BA, Univ ersity of Ca nterbu ry. This ar ticle is ba sed on my Honour s disser tation
which was t he joint winner of th e 2019 Canterbury L aw Review Student P rize. I would like t o
than k my supervi sor, Professor St ephen Todd, for his h elpful comme nts. All er rors or omis sions
are my own .
161
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As these t wo judgments re cognis e, the duty i ssue lies “at the h azy int ersection of
company and t ort law, where bedrock principle s such as limited li abilit y, separate
corporate per sonali ty, and trad itional pr inciples of negl igence collide”.4 Cou rts
must respec t both company a nd negli gence principles , which rai ses issues of
“considerable di culty a nd importance”.5 The dicult ies in doing so explain wh y
the law is fa r from settled.6
These two cas es reinforce t hat the law is i n a state of fl ux by signa lli ng both
signi ficant new in stance s in which a dut y may exis t, while q uestioni ng exist ing
approaches to t he duty issue. It is aga inst this back ground that thi s article seeks to
clari fy where a par ent company shou ld owe a duty of car e to those ha rmed by the
actions of its s ubsidiary.
The artic le first cons iders the compa ny law context t o these cla ims. Pa rt II
argues th at the twi n principles of s eparate cor porate per sonalit y and li mited
liabil ity require somet hing more tha n ownership of the subs idiary and t he parent’s
associat ed abilit y to control for a dut y of care t o exist . This avoids di culti es in
conceptua lising parent l iability as pierc ing the corporate vei l or vicarious li ability.
Part II I considers the basic dut y principles that should appl y in this area of law.
It argues th at courts s hould not approach t he issue by solely apply ing tra ditiona l
duty formul ae. Rather, the Un ited Ki ngdom Supreme Cour t correc tly emphasi ses
general neg ligence pri nciples governi ng where A owes C a duty t o prevent har m
caused by B. These g eneral negl igence prin ciples should guide t he development of
broad principle d categories of circum stances where a par ent owes a duty. This will
prevent court s fitti ng novel cases i nside exis ting il l-fitti ng precedents a nd more
clearly ident ify why a duty of ca re exists.
Part I V applies thes e basic princi ples of negligenc e to outli ne where a parent
should owe a duty of c are. Sub-Pa rt A ar gues that, t hough tor tious pri nciples
suggest a pa rent company ’s capacity to c ontrol its su bsidiar y may suppor t a duty
of care, pol icy considerat ions lim it any duty t o where the parent actua lly control s
the relevant s ubsidiary op eration. This cont rol may be direct or t hrough mand atory
group policies . In answer t o the question of mandat ory company p olicies left open
by the Cour t of Appeal, a duty based on c ontrol should only exist w here the parent
enforces group po licies. This does not prevent a dut y existing on a nother principled
basis.
4 Martin Pet rin “Assump tion of Respons ibilit y in Corporat e Groups: Chand ler v Cape plc” (2013) 7 6
MLR 603 at 60 3.
5 James Hardie Indus tries plc v White [201 9] NZSC 39 at [9].
6 James Hardie Industries, above n 1, at [62].
When is a Subsidiary’s Negligence the Parent Company’s Problem?
163
Sub-Par t B argues th at, short of ma terial c ontrol, a pa rent may owe a duty of
care for sys temically flawed pol icies or advice. This is bec ause the parent company
created th e danger of harm th at would not otherwise e xist.
Sub-Par t C argues th at a parent may owe a dut y of care wher e it assumes
responsibi lity for it s advice, pol icy, or a subsidiar y operation wh ich induces t he
subsidia ry compa ny to rely upon it . This duty e xtends beyond t hat cur rently
recogni sed on the basi s of special k nowledge and m ay exist wher e corporate
framework s induce a sim ilar rel iance on t he parent. Th is duty req uires cou rts
to extend t he subsidia ry’s reli ance to cla ima nts. Cour ts thus fa r have yet to
acknowledge nor ju stify thi s extension, but it is des irable.
Sub-Par t D argues th at a parent shou ld owe a duty of car e where it publicly
assumes re sponsibility to t he claimant for ma naging a subsidi ary’s operation. Thi s
duty may ex ist even if it does not e xercise control or i nduce its subs idiar y to rely
upon it doing so. Caut ion is necessa ry, however, to ensure t hat the as sumption
of responsibi lity is t o claim ants th at form an identi fiable clas s of people whom
reasonably rely upon the parent.
The artic le concludes by consider ing the w ider application s of the parent
company’s dut y of care in Pa rt V. Though the du ty issue is br oadly dis cussed in
the context of p ersonal injury a nd property dama ge, this approach equa lly applies
to other ty pes of negl igence and loss, i ncluding l iabil ity for subsid iary comp any
misstat ements.
Moreover, these duties of c are are founded on t he practical rel ationship bet ween
companies r ather tha n a parent’s sha reholding . Simil ar duties of c are may exi st
on any company s howing one of t he above relation ships wit h another compa ny.
In part icula r, this may occ ur in the cont ext of joint vent ures or supply ch ain
relationsh ips.
Lastly, th is approach g ives much-needed impet us to the r eassessment of t he
existi ng approach to c ompany dir ectors’ li abilit y for misst atements mad e in their
capacity a s direct ors. Approache s to an ass umption of resp onsibilit y and the
degree of contr ol in the parent-sub sidiary cont ext throw into dou bt the approaches
espoused in B ody Corporate 202254 v Taylor and Willi ams v Natural Life Health Foods
Ltd.7
7 Body Corporate 2 02254 v Taylor [2008] NZCA 317, [20 09] 2 NZLR 17; and Wil liams v Natural Life
Health Foods Ltd [1 998] UKHL 17, [19 98] 1 WLR 830.
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