Parent company liability for negligence of subsidiary

Bell Gully Solicitor Simone Cooper and Partners Jesse Wilson  and Tim Smith discuss the landmark case of James Hardie Industries Plc v White, where the Court of Appeal decided last month that a parent company could be liable for a subsidiary’s negligence. Tim will present on the topic “D&O Insurance and Indemnities: Limits and Lessons” at the Legalwise Directors and Officers: Obligations, Duties and Good Governance Seminar in March. 

Businesses often arrange their divisions as separate companies. In the first New Zealand case of its kind, released late last week, the Court of Appeal has held that parent companies could owe duties of care in tort in connection with the acts or omissions of their operating subsidiaries.​​​[1]​​​ This decision brings focus on the potential liability of parent companies in relation to New Zealand operating subsidiaries.

Background

A number of owners of buildings clad with James Hardie’s products have brought class actions against the James Hardie group. They allege, among other things, that the group companies (1) were negligent in making, supplying and promoting the products; (2) breached their duty to warn consumers that the products were defective, or to withdraw the defective products; and (3) made negligent misstatements about the products.[2]​

The holding companies’ arguments

The three holding companies applied to dismiss the claims before trial, arguing there was no serious question to be tried. They argued that a holding company could only owe a duty of care in limited circumstances where it directly controlled the relevant acts or omissions such that it assumed responsibility for them, or where it had superior knowledge of the risk of harm that its subsidiary relied on it to deploy. They argued that it was so clear that these grounds did not apply that the claims should be dismissed.

James Hardies’ Irish ultimate parent company, James Hardie Industries Plc (JHI), provided affidavit evidence asserting that its subsidiaries had full control of their operations, and JHI never had any substantive involvement in the key decisions, manufacturing or marketing of the products at issue in New Zealand.

The Court did not accept that James Hardie’s evidence on its group governance arrangement was sufficient to dismiss the claims without trial. The Court also placed some weight on documents relied on by the plaintiffs, including excerpts from the New Zealand James Hardie website, and JHI’s annual reports, as providing a “sufficient evidential narrative” that at least JHI may have met the test for liability de​scribed below. In making that assessment, the Court was applying the summary judgment and protest to jurisdiction standards.​[3] That is, that none of the plaintiffs’ causes of action could succeed, and that there was no serious legal issue to be tried.

Decisions

In relation to the duty of care claims, the High Court held there was a serious question to be tried regarding the duty to warn, but not for negligent manufacture or supply, or negligent misstatement.

The parties all appealed and cross-appealed with a view to all causes of action either being dismissed or allowed to proceed. The Court of Appeal found in favour of the claimants, holding that there was serious question to be tried regarding each of the duty of care claims.

Relying primarily on a string of English authorities, the Court of Appeal held that parent companies may owe duties of care in respect of the operations of their subsidiaries in three circumstances:

• • ​​where the parent has taken over the running of the relevant part of the subsidiary’s business;
  • where the parent has superior knowledge of the relevant part of the subsidiary’s business, the subsidiary relied upon that knowledge of its parent, and the parent knew or ought to have foreseen the alleged deficiency in the process or product; or
  • where the parent has assumed responsibility (irrespective of knowledge or skill) for the policy or advice that is linked to the wrongful act or omission.

The Court of Appeal disagreed that imposing such a duty of care in tort effectively pierces the corporate veil. The Court said that a tort duty can be imposed on a parent company through the normal negligence principles of foreseeability, proximity and policy. Being a parent company does not immunise a company from the legal implications of its actions, including the possibility that they are sufficient to give rise to a duty of care.

The matter will now proceed to trial to determine whether the holding companies are in fact liable. We will be keeping a close eye on the trial decision to see how these principles are applied.

Future developments

It will be interesting to see how the New Zealand courts strike a balance between imposing tort responsibility where it has properly been assumed and ensuring that tort liability does not extend beyond its appropriate boundaries.

The courts in the United Kingdom have grappled with these issues in a number of cases, each turning on their own facts. Some courts in the United Kingdom have noted that the establishment of a network of overseas subsidiaries with their own management structures tends to indicate that there is not the necessary relationship of proximity between the parent company and the plaintiff for a duty in tort to be imposed. However, this recent decision is an important reminder of the possibility of such liability, in the right circumstances. The exact nature of those circumstances, and the outcome of this particular proceeding and its implications for New Zealand law, remain to be seen.

Please contact the authors if you have any queries about this article or the James Hardie case. 

Simone Cooper is a Solicitor at Bell Gully. Contact Simone at simone.cooper@bellgully.com or connect via LinkedIn.

Partner Jesse Wilson is an experienced commercial litigator with expertise in company and shareholder disputes, competition law and regulatory investigations, particularly in securities law. ​Jesse has a commercial litigation practice encompassing regulatory matters (corporate and competition law), corporate disputes, construction, insurance and general civil disputes. He has advocacy experience in leading trials and appeals, and his litigation experience covers all courts, arbitration, and mediation. Jesse holds a Master of Laws degree from Stanford Law School. Jesse was recognised as a next generation lawyer in the Legal 500 Asia Pacific 2018. He was a member of the Law Society’s Law Reform Committee from 2009-2017, and is currently a member of the Human Rights Centre Advisory Board at Auckland Law School.​ Contact Jesse at jesse.wilson@bellgully.com or connect via LinkedIn.

Partner Tim Smith is an experienced commercial and public law litigator. Tim specialises in energy, insolvency, tax, competition, regulatory and public law litigation and has appeared as counsel in a number of New Zealand’s leading cases in those fields. Prior to joining Bell Gully Tim was a partner for five years in the Wellington Crown Solicitor’s Office and, before that, Crown Counsel in, and Deputy Team Leader of, the tax and commercial team of the Crown Law Office. He has also worked in the litigation department of another national law firm and been a barrister at a leading commercial chambers in London. Tim has worked extensively with commercial and public sector clients both as an advisor and advocate as required. He has appeared regularly in courts and tribunals in both the United Kingdom and in New Zealand, including as lead counsel at all levels of the New Zealand court system. Tim has frequently advised on high profile sensitive matters including, recently, advising the Chief Inspector of Corrections on his investigation into the “Fight Club” at Mount Eden Corrections Facility. Tim has a particular interest in cases involving systemic failure and has advised on alleged state liability for leaky home syndrome, the Pike River Coal mine tragedy and New Zealand’s financial collapses. Contact Tim at tim.smith@bellgully.com or connect via LinkedIn.

Disclaimer
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.