20 December 2019

Group structures are used regularly in order to protect assets from the risks of a trading subsidiary. We are often asked for practical advice in order to minimise a parent company’s risk of liability for a subsidiary’s actions.

An English appeal case from 2018 provided useful guidance. That case followed upon violent attacks in a tea plantation in Kenya after the 2007 Presidential Election, as a consequence of which 218 employees brought a claim against Unilever Tea Kenya Limited (UTKL) and its parent company Unilever plc for a breach of duty of care. 

The Court of Appeal upheld the High Court’s decision that there was no duty of care owed by Unilever to the individuals affected by the violence at the plantation operated by its subsidiary, UTKL.

The claimants argued that UTKL and Unilever owed them a duty of care in tort (delict in Scotland) to take effective steps to protect them from the violence in Kenya, which duty had been breached. The original High Court decision was that the claimants had no arguable claim against either company and therefore no duty of care was owed by Unilever and UTKL to the claimants. In reaching its decision, the High Court found that the damage was not foreseeable by either UTKL or Unilever. The judge held that it would not be fair, just and reasonable to impose a duty of care, since the duty would require Unilever to act as a surrogate police force. However, the judge held, with some hesitation, that there was a sufficient degree of connection between the activities, and omissions to act by Unilever and UKTL to establish proximity. This decision was appealed.

In dismissing the appeal the Court held that there was no proximity between the claimants and Unilever on that basis of the limited advice given by Unilever to UTKL in relation to their crisis management policy. The group’s system of risk management stated that it was the responsibility of managers at local level, such as the managers of UTKL, to ensure that appropriate procedures were in place. Neither in drafting the crisis management policy, nor in training its staff was UTKL subject to direction or detailed advice from Unilever.

The Court of Appeal identified two instances in which a parent company may owe a duty of care in relation to the actions of a subsidiary:

1) Where the parent has taken over the management (including joint management) of the relevant activity of the subsidiary; or

2) Where the parent has given advice to the subsidiary in relation to a specific risk.

The claimants sought permission to appeal this decision to the Supreme Court, however, this was refused.

Although each group company is considered a separate legal entity, it is important to be aware of the guidance this case provides and the circumstances in which a parent company may be found to owe a duty of care to individuals affected by a subsidiary’s actions/inactions.

Some practical advice:

• Parent companies should avoid directly exercising operational control over subsidiaries;
   
• Clear management procedures should distinguish between the parent company and subsidiaries;
   
• Subsidiaries should be responsible for implementing group policies, which the parent company may supervise; and
   
• Directors of parent companies should be wary of providing advice to subsidiaries in relation to specific risks.

Contact: Scott Wyper, Partner T: 0141 221 8012 E: swy@bto.co.uk