The liability of parent companies for wrongdoing within subsidiaries is an old topic. Modern discussions tend to extend the potential liability of the parent to wrongdoing within the whole supply chain (or, even, the value chain), thus embracing liability for the actions of contractors and sub-contractors. The legal mechanism at the centre of traditional discussion is piercing the veil of the subsidiary company – a mechanism not obviously apt for contractors. In any event, UK law set its face firmly against piercing the veil in Adams v Cape Industries (Court of Appeal, 1990), even though the claimants were tort victims and thus non-adjusting creditors.

Almost immediately thereafter, however, the UK courts began to develop a tort theory of parental liability for wrongdoing within subsidiaries. This was derived from the assertion of the relevant degree of managerial control over the subsidiary by the parent and so depended on the level of control exercised (or, perhaps, claimed by the parent) over the subsidiary’s activities. Although initially developed in a purely domestic setting and where the main tortfeasor (the subsidiary) could not meet the claim upon it, the most recent cases have involved subsidiaries of multinational companies based in the developing countries where the subsidiary was not obviously unable to meet the claim upon it. The claimants’ desire to sue the parent in the English courts was based on access to justice arguments. Although not so far extended in a judgement, this tort theory would appear to be available against contractors where the parent has exercised the relevant level of control over the contractor. But, liability for the actions of contractors has been established on the more limited theory of the creation by the defendant company of a “dangerous situation”, which a third party exploits to the detriment of the claimants.

A second way around the absence of veil piercing is the imposition of a regulatory obligation upon parent companies to monitor compliance by subsidiaries (and contractors) with applicable obligations and to make parents liable if the compliance exercise is not properly carried out. This is the approach taken in the proposed EU Directive on Corporate Sustainability Due Diligence. In spite the width of the title, the Directive will cover only a set of international human rights and environmental conventions – though the set is large. The Directive requires large companies (defined by turnover levels), even if they are incorporated outside the EU but have the relevant
level of intra-EU turnover. They must assess the risks of harm arising out of breaches of the international obligations throughout the supply chain; take steps to remove or reduce the risks so revealed (or which ought to have been revealed); and mitigate harms arising when breaches to occur. The company is liable to regulatory penalties if it fails at any of these three stages and is liable to be sued by those who suffer actual harm as a result of the company’s negligent non-compliance with its regulatory duties.

It is clear that this initiative of the EU is aimed principally at non-compliance occurring outside the EU within host states. I suggest that companies subject to the Directive will find themselves in a difficult place if non-compliance is a deliberate policy of the host state (which is not required to be a signatory of the relevant international treaty) or where the host state interprets the treaty obligation in a way not generally accepted by EU courts or regulators. The risk of reputational harm the parent may suffer as a result of an adverse judgment in the EU may cause the company to exit from the business in question by selling it to a competitor not subject to the EU rules. The result is not likely to be a higher level of compliance with the international standards, but only a contraction in the activities of EU companies. The paper concludes with some reflections on the choice between tort and regulation in relation to the unintended consequences of parent company liability.