Australia – Cross-border guide to parent company liability for foreign subsidiaries

How and when can a parent company be liable for conduct of its (foreign) subsidiaries

In Australia, whether a parent company is liable for the wrongs of a foreign subsidiary is determined by applying orthodox principles of the tort of negligence. Similarly to the UK (as the UK Supreme Court recently confirmed in Vedanta¹ and Okpabi²), under Australian law the liability of parent companies in relation to the activities of their subsidiaries is not a distinct category of liability in common law negligence. The liability of a parent company for the negligent acts of its subsidiary is to be determined on ordinary, general principles of the law of tort regarding the imposition of a duty of care.

Specifically, Australian courts have regard to the ‘salient features’ of the relationship between the parent company and claimant who is alleged to have suffered harm by the conduct of the subsidiary. Examples of the types of salient features considered by Australian courts appear below.³ Australian courts also consider as part of their analysis whether considerations of public policy require the alleged duty of care to be modified or abrogated.⁴

Australia’s apex court, the High Court of Australia, has said that this is an area of the law that must develop cautiously and incrementally on a case-by-case basis.⁵

It is uncontroversial in Australia that each entity within a corporate group has a separate legal personality with its own rights, duties, responsibilities and obligations.⁶ One practical effect of separate personality means that a parent company can minimise its risk whilst maintaining control over the conduct of a subsidiary through well-established principles of corporations law that exist at general law and under statute.⁷

Unlike in the United Kingdom and Canada, the courts in Australia have not (yet) engaged with the emerging concept of “group enterprise theory”. To the extent that it has been considered, the courts have acknowledged that there is gulf between the strict legal position of separate legal personalities within a corporate group and the commercial reality that a parent company often exercises complete control.⁸

Even where there is a close relationship of purpose, personnel, membership and control, the courts in Australia have been reluctant to ‘pierce the corporate veil’.⁹ But there have been exceptions in very limited circumstances, such as where the parent company is using the subsidiary to evade legal obligations or conceal fraud.

In those cases where courts in Australia have found a parent company liable for the conduct of its subsidiary, the court has found that the parent company owes a duty of care to the claimant. In doing so, the courts have applied orthodox principles of the tort of negligence. Those principles impose a direct liability on the parent company for losses suffered by the claimant for the negligent conduct of a subsidiary. By contrast with other common law jurisdictions, the courts in Australia have not sought to pierce the corporate veil between the parent and subsidiary so as to impose a form of indirect liability.

The cases have shown that the requisite level of knowledge of, and control over, the conduct of a subsidiary may be sufficient for a court to impose a duty of care on the parent company so as to make it liable for harm suffered due to the conduct of its subsidiary. Another salient feature which has emerged as a critical consideration in the analysis is whether the claimant is vulnerable, in the sense of not being able to take steps to protect itself from reasonably foreseeable harm. The High Court of Australia has said that “this is an area of the law in which the courts should move incrementally and very cautiously indeed.”¹⁰

In an attempt to reconcile the strict legal approach with commercial reality, legislatures have introduced some exceptions to the separate legal personality of a subsidiary. For example:

• a holding company may be liable for the debt of a subsidiary if incurring the debt will lead to insolvency;¹¹
• a director of a subsidiary corporation is taken to act in good faith in the best interests of a wholly-owned subsidiary if the director is permitted by the constitution of the subsidiary company to act in the best interests of the parent company;¹² and
• exempting wholly-owned subsidiaries from financial disclosure.¹³

Jurisdiction gateway considerations

Where a claimant suffers extra-territorial harm, an Australian court is likely to have jurisdiction for a claim against an Australian parent company alleging liability for the wrongdoing of a foreign subsidiary.

Australian courts determine whether they have jurisdiction by applying the standard of whether they are a “clearly inappropriate forum”.¹⁴ If a defendant is an Australian registered company, it is not likely that a court would determine that its jurisdiction is “clearly inappropriate”.

Jurisdictional challenges arise when courts consider which law is to be applied in the determination of a dispute. The issues commonly considered are whether Australian law applies, where the conduct that caused the harm occurred, and what the law is where the harm was suffered.

The general approach taken by courts is to apply the law of the jurisdiction where the conduct that caused the harm occurred.¹⁵ Put another way, the court will focus on the location of the conduct that caused the harm, rather than the location where the harm is suffered. There are two main exceptions to this approach:

• If the harm was committed in two jurisdictions, the court will normally apply the law of the jurisdiction in which the harm is suffered rather than where it was caused.¹⁶
• If the law of the jurisdiction where the harm was committed does not recognise parent liability, the courts will normally look to the whole of the events that led to the harm and identify the most appropriate jurisdiction.¹⁷

Key recent cases and developments

CSR Ltd v Wren18 is an exemplar of the modern approach taken in Australia to determining parent company liability for the conduct of a subsidiary.

In CSR, the New South Wales Court of Appeal considered whether a parent company was liable for mesothelioma in employees caused by exposure to asbestos whilst working for a wholly-owned subsidiary. In holding the parent company liable, the Court focussed on the control it exercised over the subsidiary.

Subsequent cases have developed the analysis courts now must engage in. That analysis sees courts consider the ‘salient features’ of the relationship between the parent company and the claimant to establish whether there is a sufficiently close relationship so as to give rise to a duty of care and direct liability.¹⁹ The salient features applied by the courts are not a formula but ‘control mechanisms’ that are used as part of an evaluative assessment of the degree of connection between the parent company and its subsidiary.²⁰

Examples of those salient features include²¹:

• the foreseeability of harm;
• the nature of the harm alleged;
• the degree and nature of control able to be exercised by the defendant to avoid harm;
• the degree of vulnerability of the claimant to harm from the defendant’s conduct, including the capacity and reasonable expectation of a claimant to take steps to protect itself;
• the degree of reliance by the claimant upon the defendant;
• any assumption of responsibility by the defendant;
• the proximity or nearness in a physical, temporal or relational sense of the claimant to the defendant;
• the existence or otherwise of a category of relationship between the defendant and the claimant or a person closely connected with the claimant;
• the nature of the activity undertaken by the defendant;
• the nature or the degree of the hazard or danger liable to be caused by the defendant’s conduct or the activity or substance controlled by the defendant;
• knowledge (either actual or constructive) by the defendant that the conduct will cause harm to the claimant;
• any potential indeterminacy of liability;
• the nature and consequences of any action that can be taken to avoid the harm to the claimant;
• the extent of imposition on the autonomy or freedom of individuals, including the right to pursue one’s own interests;
• the existence of conflicting duties arising from other principles of law or statute;
• consistency with the terms, scope and purpose of any statute relevant to the existence of a duty; and
• the desirability of, and in some circumstances, need for conformance and coherence in the structure and fabric of the common law.

Australian courts also consider as part of their analysis whether considerations of public policy require the alleged duty of care to be modified or abrogated.²² The overriding concern is to avoid the spectre of “liability in an indeterminate amount for an indeterminate time to an indeterminate class.”²³

Practical implications and key takeaways from the Australian approach

Under Australian law, parent companies can seek to protect themselves from liability for the conduct engaged in by foreign subsidiaries by structuring their relationships to reduce the possibility of a court finding the existence of salient features that give rise to a duty of care.²⁴ Another obvious safeguard is ensuring that the parent has sufficient insurance to protect against liability incurred by a subsidiary.

Given the reluctance of the courts in Australia to engage in judicial activism, it is likely that any significant change in this area of the law will require legislative intervention. Absent intervention, we expect to continue to see an incremental approach taken by the courts in the development of this area of the law.