Parent company liability for subsidiary’s negligence

Friday 21 December 2018

Authors: Simone Cooper, Jesse Wilson and Tim Smith

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.

If you would like to discuss the implications of the James Hardie case, please contact your usual Bell Gully adviser or any of the contacts listed.


1James Hardie Industries Plc v White [2018] NZCA 580.

2 The owners also alleged breach of the Consumer Guarantees Act 1993 and Fair Trading Act 1986. This note only considers the duty of care claims.

3 JHI protested the Court’s jurisdiction over it, as an Irish company. The New Zealand and Australian companies applied for summary judgment.


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.

For more information
  • Jesse Wilson

    Partner Auckland
  • Tim Smith

    Partner Wellington
  • Jenny Stevens

    Partner Wellington
Related areas of expertise
  • Litigation and dispute resolution
  • Class actions