IICA’s Legal Compliance Manual

I just came across a Legal Compliance Manual put together by the Indian Institute of Corporate Affairs (IICA). It contains a list of compliances required to be carried out on the part of businesses that arise under various central and state legislation. Areas addressed include corporate law, environmental law, labour law, tax law and other general laws.

It is indeed a useful tool for practitioners and businesses given the plethora of legal compliance required on their part while operating in India.

Parent's Duty to Employees of its Subsidiary: Chandler v. Cape affirmed

In an earlier post, we had discussed the judgment of the England & Wales High Court in Chandler v. Cape plc, [2011] EWHC 951. In that case, the Court had held that in certain circumstances, a parent company would owe a duty of care to the employees of the subsidiary even in situations where the tests for lifting the corporate veil are not satisfied. This judgment has been affirmed today by the Court of Appeal in Cape v. Chandler, [2012] EWCA Civ 525.

The Court of Appeal “emphatically rejected” the proposition that the case was concerned with principles pertaining to lifting the corporate veil. It was common ground between the parties that the tests for lifting the veil were not satisfied; and the Court (para 70) expressly clarified that the issue was not one of separate legal personality, but of whether the parent company had a direct duty to the employees of the subsidiary.

The Court of Appeal noted that the law of negligence develops incrementally, and also pointed out that an analogous principle was available in the line of authority on the duty of a person to intervene to prevent damage to another. The Court referred to Lord Goff’s statement in Smith v Littlewoods Ltd., [1987] AC 241, that there is in general no duty imposed on a person to prevent third parties causing damage to another. However, Lord Goff had qualified this general rule: there could be a duty to third parties causing harm to each other in situations where there was “a relationship between the parties which gives rise to an imposition or assumption of responsibility”. The Court of Appeal held that this “assumption” of responsibility need not be a voluntary or conscious assumption of responsibility (Customs and Excise Commissioners v Barclays Bank, [2007] 1 AC 181).

The Court concluded (para 80), “… 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, (1) the businesses of the parent and subsidiary are in a relevant respect the same; (2) the parent has, or ought to have, superior knowledge on some relevant aspect of health and safety in the particular industry; (3) the subsidiary's system of work is unsafe as the parent company knew, or ought to have known; and (4) the parent knew or ought to have foreseen that the subsidiary or its employees would rely on its using that superior knowledge for the employees' protection. For the purposes of (4) it is not necessary to show that the parent is in the practice of intervening in the health and safety policies of the subsidiary. The court will look at the relationship between the companies more widely. The court may find that element (4) is established where the evidence shows that the parent has a practice of intervening in the trading operations of the subsidiary, for example production and funding issues…”

One issue which arises is this: is this “incremental development” of the law of negligence confined to “employee health and safety” cases, or would it extend beyond those cases in a more general commercial context? Can a parent have a duty of care to prevent a pure contractual breach by its subsidiary? The tests for liability in a commercial context would perhaps become clearer only after further development of the common law in this regard.

Parent Company's duty to employees of its Subsidiary

In an interesting judgment delivered earlier this month, Chandler v. Cape Plc. [2011] EWHC 951 (dt. 14/4/2011), it has been held that a parent company owes a duty of care to employees of its subsidiary. The decision contains a detailed analysis of the scope of the duty of care in such situations; and provides some indication that the existence of the corporate veil between the parent and its subsidiary (which was not pierced in the case) may not prevent a direct duty of care between the parties.

The Claimant, Chandler, was employed between 1959 and 1962 by a company – Cape Products. In 2007, the Claimant discovered that he was suffering from asbestosis which was caused due to exposure to asbestos in the course of his employment. Further, this exposure was caused in turn by negligence on the part of Cape Products. Cape Products, however, had long ceased to exist; and the Claimant framed his claim by alleging that at the relevant times, a duty of care was owed to him by Cape Plc., the parent of Cape Products. In effect, the claim was that Cape Products (subsidiary) and Cape Plc. (parent) were joint tortfeasors, jointly and severally liable to pay damages to the Claimant.

The Court began its analysis by noting:

…the fact that the Claimant was owed a duty of care by Cape Products does not prevent such a duty arising between the Claimant and other parties.  No doubt, the fact that a duty situation exists between the Claimant and his employer is a factor to be taken into account when deciding whether another party owes the Claimant such a duty.  But, to repeat, the existence of the duty between the Claimant and his employer cannot preclude another person being fixed with a duty of care.  Second, the fact that Cape Products was a subsidiary of the Defendant or part of a group of companies of which the Defendant was the parent cannot mean by itself that the Defendant owes a duty to the employees of Cape Products.  So much is clear from Adams and others v Cape Industries plc & another [1991] 1 AER 929.  Equally, the fact that Cape Products was a separate legal entity from the Defendant cannot preclude the duty arising.  Third, this case has not been presented on the basis that Cape Products as a sham – nothing more than a veil for the activities of the Defendant.  Accordingly, this is not a case in which it would be appropriate to “pierce the corporate veil.”

The Court also accepted (on the authority of Smith v. Littlewoods Organisation Ltd [1987] A.C. 241) that in general, the law imposes no duty of care upon a party to prevent a third party from causing injury to another. However, the Court held (on the basis of Caparo v. Dickman) that this statement was subject to some exceptions. The exceptions were: “… a) where there was a special relationship between the Defendant and Claimant based on an assumption of responsibility by the Defendant; b) where there is a special relationship between the Defendant and the third party based on control by the Defendant; c) where the Defendant is responsible for a state of danger which may be exploited by a third party; and d) where the Defendant is responsible for property which may be used by a third party to cause damage…”

On the facts, it was held that Cape plc. had actual knowledge of the working conditions of the claimant – and this was “no failure in day-to-management; this was a systemic failure of which the Defendant was fully aware.” In such circumstances, the Claimant’s injury should have been foreseen by Cape plc. Further, “At any stage [Cape plc] could have intervened and Cape Products would have bowed to its intervention…” In view of this, it was held that the there was enough proximity between the Claimant and the Defendant to impute a duty of care on the defendant.

The Court did note that merely because there was a parent subsidiary relationship, it did not follow that the parent had a duty of care to the subsidiary’s employees. But besides the normal incidents of a parent-subsidiary relationship (such as the potential to address ‘systemic failures’), the only fact which the Court highlighted was that Cape plc. was itself medical officers who were given the responsibility of looking at the health and safety issues of all group employees.

This fact would of course be insufficient for piercing the veil of the subsidiary; but the Court has held that the absence of a factual foundation strong enough to pierce the veil need not mean that an independent duty of care cannot be established. On the facts, as Cape plc. retained the potential to alter the policies of its subsidiary, a duty of care was held to exist. In the context of a parent-subsidiary relationship, however, it would appear that such potential control would almost always exist. It is not clear when, on the Court’s analysis, the parent company would not have a duty of care to third parties which it knows are dealing with its subsidiary.The decision is an illustration of how the corporate veil may not always be an adequate protection for shareholders.

Confidentiality = Non-compete?

In India, there is a fair amount of debate regarding the enforceability of non-compete agreements given Section 27 of the Contract Act that invalidates contracts in restraint of trade. Recent developments in California may throw some further light on the issue.

Oracle’s appointment of former HP-CEO Mark Hurd has given rise to litigation by HP. This report in the Wall Street Journal notes that while Hurd entered into a confidentiality agreement with HP, he was not bound by any non-compete obligation:

One sticking point in Mr. Hurd's move could be the terms of his severance package from H-P. That package, which could be worth more than $35 million depending on H-P's stock price, doesn't contain a noncompete clause as those are typically difficult to enforce in California. However, Mr. Hurd did agree to a 24-month confidentiality agreement, which prevents him from disclosing sensitive information related to H-P.

The question then is whether the confidentiality clause may be enforced by preventing an employee from working for a competitor such that it would effectively operate as a non-compete. Professor Bainbridge outlines his view of the legal position:

Count me a skeptic. Courts are often reluctant to let trade secret law impose prior restraints on free movement of labor. If HP had wanted to put restraints on Hurd's post-HP employment, it could have done so in the employment agreement. Given that courts construe those agreements narrowly so as to prevent unreasonable restraint of trade, moreover, HP should not get by a legal back door what it did [n]ot bargain for in the first instance. If Hurd reveals trad[e] secrets or other protected information, HP can always sue him ex post.

At a broad level, this seems similar to the position under Indian law.