When may a parent (holding) company be liable for defective products made, marketed and sold by its subsidiary company?  

Imposing a duty of care upon a parent for the acts of its subsidiaries is a developing area of law in Australia and England and Canada and a largely untouched area of law in New Zealand. This article summarises the developing body of principles extracted from Australian, English and Canadian authorities on “parent company liability”, as discussed by the Court of Appeal of New Zealand in the recent James Hardie interlocutory decision (referenced below). The New Zealand claimants in James Hardie are arguing to impose a novel duty of care (i.e. one not previously imposed in earlier case law) upon three holding companies that unsuccessfully attempted to get those claims thrown out of court. We discuss the James Hardie case below and the principles emerging of the circumstances in which such a duty of care might be imposed. 

James Hardie Industries PLC v White [2018] NZCA 580 [13 December 2018]

“James Hardie” fibre cement building products are well-known by both Aussies and Kiwis. The original James Hardie business was established in Melbourne in 1888. It expanded to New Zealand in 1937. There are currently a number of operating companies and holding companies in the James Hardie group of companies (the Group), incorporated either in Australia or New Zealand. James Hardie Industries Plc (JHI), incorporated in Ireland and listed on the Australian Securities Exchange, is the ultimate parent company of the Group.

Defective exterior cladding products manufactured and supplied by the James Hardie business in New Zealand have resulted in legal claims in New Zealand from past and present owners of approximately 1132 homes, four commercial buildings and five retirement villages. The properties were constructed or re-clad with James Hardie products between 1983 and 2011. The claimants allege that the James Hardie products were defective, not watertight, and failed to comply with prevailing building standards. Legal action has been taken by those claimants against the group. 

Each of the holding companies involved in defending the claims against them, sought to bring an early end to those claims, arguing in Court that, since they did not manufacture, market or supply the allegedly defective products, the claimants cannot succeed against them. JHI, the ultimate holding company, protested the jurisdiction of New Zealand courts to determine the proceeding against it. These arguments did not wash with the NZ courts and all three holding companies remain defendants in the proceeding. They will be tried as to whether they are liable for defective products made, marketed and sold by their subsidiary.

This means that the developing law in the area of holding company liability for the acts and omissions of subsidiaries will be argued and developed further in New Zealand when this case goes to trial. 

Developing body of principles for imposing a duty of care on a parent company

So what developing body of principles are likely to be applied to circumstances in which a duty of care may be imposed upon a parent company for the acts or omissions of its subsidiary? It is common ground that something more than ownership, and the ability to control which comes with that, is needed to justify imposing a duty of care. While the law is far from settled, the following principles can be extracted from the law in Australia the United Kingdom or Canada:

-         The central principle of modern company law is that a company has its own legal personality.

-         The principle that a company must be treated like any other independent person with rights and liabilities appropriate to itself extends to groups of companies.

-         Each company in a group of companies is a separate legal entity possessed of separate legal rights and liabilities, even where, by reason of the extent of control exercised over the affairs of the subsidiary, they are “creatures of their parent companies”.

-         A parent company does not owe a duty of care in respect of the operations of its subsidiary merely because it has the ability, through its shareholding, to control the operations of its subsidiary by appointing directors to it.

-         A wholly owned subsidiary is not, by that reason alone, the agent of the parent company, even where they have directors in common. Something more than the fact of control of the subsidiary by its parent is needed to constitute an agency relationship.

-         A shareholder does not, by reason only of its position as shareholder, owe a duty of care to anybody.

-         A parent company can have a duty of care imposed upon it, in the same way as that duty can be imposed upon any party. The law does not shield a company from the legal consequences of contracts it enters into as part of its support of the operations of its subsidiaries (in other words, a parent company can be liable for the acts of its subsidiary where it has taken over running aspects of the subsidiary’s business).

-         A party alleging a duty of care in a novel situation must establish first that the loss was a reasonably foreseeable consequence of the defendant’s acts or omissions (i.e a screening mechanism). If foreseeability is established, the court must address whether that loss occurred within a relationship that was sufficiently proximate. This requires, amongst other things, an examination of the closeness of the connection between the parties. 

-         Even if foreseeability and proximity are established, a court may decide as a matter of policy that no duty should be imposed because of external factors to the relationship that would make it unfair and unreasonable to do so (such as the capacity of the parties to insure, impact on the operation of markets, consistency within the overall legal system).

Categories of potential liability

The court in James Hardie, after analysing the legal authorities in Australia, United Kingdom and Canada, suggest three categories of potential liability for parent companies, while not ruling out the possibility that more bases for liability will be recognised or developed further. These are:

[1]         where the parent takes over the running of the relevant part of the business of the subsidiary

[2]         where the parent has superior knowledge of the relevant aspect of the business of the subsidiary, the subsidiary relied on that knowledge, and the parent knew or ought to have foreseen the alleged deficiency in process or product

[3]         more generally where the parent takes responsibility (irrespective of superior knowledge or skill) for the policy or advice which is linked to the wrongful act of omission.

Based on the above described categories, the court in James Hardie was satisfied that the conduct of JHI (parent) brought it within those categories in which a duty may be imposed upon parent companies in connection with the activities of their subsidiaries. This proceeding was held to be one in which the duty issues should be resolved at trial, with the benefit of evidence. We will watch this proceeding with interest.

Agnes McKay