By Xue Feng
It is an unresolved but important issue whether one legal entity can be vicariously liable for another legal entity’s tort in a corporate group. The debate over a parent company’s liability for its subsidiary’s torts has emerged, particularly in the context of environmental harms or mass torts resulting in personal injuries. Often, liability claims surpass the subsidiary’s value, leading to its insolvency, and tort creditors attempt to claim against alternative defendants, especially the parent company.
To address corporate tort issues, several possible approaches have been raised and developed by courts in the United Kingdom (UK), including the doctrine of veil-piercing and the tort of negligence. However, these approaches have their own limitations when applied to certain circumstances. To enrich the whole discussion on the appropriate remedies to corporate tort problems, I seek to address whether vicarious liability of parent companies is a feasible response under UK law. I examine this issue in my article published recently in the Journal of Corporate Law Studies.
Prior literature seldom discusses in detail the extension of vicarious liability in corporate tort contexts. The article contributes to efforts to justify the extension of vicarious liability to a legal entity for another entity within the same corporate group. It argues that it is possible to impose vicarious liability on a parent company for its subsidiary’s tort if the relationship between the parent and the subsidiary company is akin to employment, particularly when the entrepreneur test is met, meaning that the subsidiary is considered to be in business solely on behalf of, and for the interests of, its parent company. Additionally, the claimed tort should be closely connected with that quasi-employment relationship. The article further contends that while extending vicarious liability to group scenarios offers a potential remedy for corporate tort issues, it may not be an optimal approach in most cases. This is primarily because the tests for establishing a relationship akin to employment between parent and subsidiary companies are difficult to satisfy in most corporate group structures.
The article first reviews case law and literature involving current advances in the determination of vicarious liability and its potential application in the group context. Vicarious liability, as a category of joint liability, inherits the nature of providing remedies and incurring liability among multiple tortfeasors, especially the solvent defendants. The case law has provided possible solutions to impose vicarious liability beyond the traditional employment relationships. In the case The Catholic Child Welfare Society and others v Various Claimants (FC) and The Institute of the Brothers of the Christian Schools and others [2012] UKSC 56 (CCWS), Lord Phillips put forward five essential factors for determining a relationship akin to employment. These factors were later distilled into ‘three interrelated incidents’ by Lord Reed in Cox v Ministry of Justice [2016] UKSC 10 to determine the applicability of vicarious liability. In Barclays Bank plc v Various Claimants [2020] UKSC 13, Baroness Hale followed these approaches and enhanced the importance of the criterion determining whether the tortfeasor is carrying on business on his own account. Lord Burrows, in the Supreme Court, set down his summary for imposing vicarious liability in Trustees of the Barry Congregation of Jehovah’s Witnesses v BXB [2023] UKSC 15. The relevant elements he suggested for determining a relationship ‘akin to employment’ were similar to the list of factors given by Lord Phillips in CCWS. It has been acknowledged that employment relationships are no longer restricted, by definition, to a contract of service; rather, current methods to establish the employment relationship rely on multiple tests.
The article specifically discusses the essential tests of control, organisation, integration, and entrepreneur in determining the relationship ‘akin to employment’ between a parent company and its tortfeasor subsidiary. By applying these tests to cases such as Chandler v Cape plc [2012] EWCA Civ 525, The Queen v Waverley Construction Co Ltd; Tidewater Construction Co Ltd, Third Party (1972) 30 DLR (3d) 224,and Nevsun Resources Ltd v Araya [2020] SCC 5, the author found that in corporate group cases the control, organisation, and integration tests are possible to satisfy for determining a relationship akin to employment based on the specific facts of each case. However, the entrepreneur test presents a significant challenge, as it is often difficult to find that a subsidiary company conducts business entirely on behalf of, and in the interests of, its parent company in most group cases.
Regarding the close-connection test, the author argues that the ‘enterprise risk test’ can be broadened to explain the close connection between the relationship between the parent and subsidiary companies and the tort at issue. By applying the close-connection test to cases such as Chandler v Cape, Vedanta Resources Plc and Konkola Copper Mines Plc v Lungowe and others [2019] UKSC 20, and Okpabi and others v Royal Dutch Shell Plc and Shell Petroleum Development Company of Nigeria Ltd [2021] UKSC 3, the author concluded that in corporate tort cases, it occurs when a parent company establishes a close relationship with its subsidiaries and becomes deeply involved in their operational practices, resulting in relevant torts.
Finally, the article analyses policy concerns surrounding the issue. It demonstrates that policy rationales, such as enterprise risk, loss spreading, compensation, and deterrence, collectively support justifying a parent company’s vicarious liability for its tortious subsidiary. However, a parent company’s strict liability cannot be solely determined by these policy rationales, as they possess inherent flaws and fail to fully explain the doctrine. For instance, enterprise liability is insufficient to justify vicarious liability for non-profit businesses. Individually, the policy rationales are inadequate to justify vicarious liability. Instead, they serve as a fallback when principled tests are unclear or insufficient.
Moreover, the question remains whether the imposition of vicarious liability on a parent company conflicts with the principle of limited liability. The similar issue arises when applying the doctrine of veil-piercing. However, courts still allow for piercing the corporate veil to prevent the abuse of the principles of limited liability and separate legal personality. The fulfilment of the entrepreneur test for vicarious liability could be regarded as a particular instance of abusing the principles of limited liability and separate legal personality. If both the relationship and connection requirements for imposing vicarious liability are met in corporate tort cases—namely, if the relationship between a subsidiary and its parent company is akin to employment, and the subsidiary’s wrongdoing is closely linked to this special relationship—it is reasonable to impose vicarious liability on the parent company, rather than adhering strictly to the principle of limited liability.
Keywords: Parent company liability, vicarious liability, quasi-employment relationship
AUTHOR INFORMATION
Xue Feng is a Visiting Researcher at the EW Barker Centre for Law and Business, National University of Singapore from Jul-August 2024.