The legal threat to every blue chip

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StockbrokerLimited liability -- the legal principle that the owners of a company are not liable for its debts -- is a cornerstone of the modern economy because it encourages investors to pool their capital to form businesses that hopefully become larger businesses over time.

If companies did not have limited liability, fewer businesses would be started, and those that were would find it harder to raise capital. Most passive investors would prefer to avoid taking on the risk of forming a partnership instead, because every partner is liable for the partnership's debts.

Last month a court judgment partially rewrote the law of limited liability in Britain by ruling that, in certain circumstances, a company is responsible for the liabilities of its subsidiaries, even if it did not provide a guarantee for those liabilities. This has major implications for multinationals that are based here, and may encourage some to move abroad.


Piercing the corporate veil
Companies have legal personality so they can enter into contracts upon their own behalf and be sued just as if they were individuals. But only in very rare instances are the owners of a company held personally liable for its actions, and these are usually limited to situations where the company was set up to evade another company's liabilities, if they formed it for a criminal purpose or where they have given a guarantee to its creditors.

The case that "pierced the corporate veil" concerns asbestosis, so it's no surprise to see that it involves Cape, which has been dealing with asbestosis claims for quite some time.

Just the facts
The facts of the case are that Mr David Chandler worked for Cape Building Products from 1959 to 1962, which at the time was a subsidiary of Cape. In 2007 he discovered that he had asbestosis, and because Cape Building Products had long since ceased to exist, he decided to sue Cape.

The High Court ruled that Cape was liable for Mr Chandler's illness and awarded him £120,000 in damages. Cape appealed and last month the Court of Appeal upheld the High Court's original ruling. It said that in certain circumstances a parent company is fully responsible for the health and safety of the employees of a subsidiary, and that this liability will remain even after the subsidiary has been wound up.

The Supremes
Cape has asked for leave to appeal to the Supreme Court of the United Kingdom. Given the implications, I think that it is very likely that an appeal will be heard.

So Chandler v Cape plc (2012) looks set to join the list of landmark judgments in the law of negligence, which was created in 1932 when Lord Atkin ruled in Donaghue vs. Stevenson (1932) that manufacturer of a bottle of ginger beer was liable for the harm caused to the drinker because it contained a decomposing snail.

Cape is no stranger when it comes to asbestosis cases, and in 1990 the Court of Appeal ruled in its favour in Adams v Cape Industries plc by preventing the judgments of American courts from being enforced against Cape.

But in recent years there has been a shift in the prevailing mood, and the ancient maxim Qui sentit commodum debet sentire et onus, which roughly translates as "he who obtains the advantage ought to bear the burden", had been used to justify judgments similar to Chandler v Cape plc in some foreign courts. It now applies in Britain.

The Duck test
Although Lady Justice Arden said in the ruling that the decision does not pierce the corporate veil, many people will disagree by applying the Duck test, which says: "If it looks like a duck, swims like a duck and quacks like a duck, then it probably is a duck."

This judgment is bound to give some multinationals second thoughts about setting up shop in Britain, and those that are already here might think about moving elsewhere.

Foreign claims could easily be brought before the English courts because since 2005 our courts have been obligated to hear foreign cases where the parent company is domiciled in England. This is in contrast to the situation in many other countries, where courts routinely refuse to hear cases that could first be brought before a local court in order to restrict "jurisdiction shopping".

So you could have a situation where workers in South African mines that are ultimately owned by AngloAmerican bring claims against the parent company in the English courts. The same could apply to the oil giants BP and Royal Dutch Shell in respect of their overseas operations.

Since there are cases working their way through the courts that could extend the definition of "domicile" to include foreign countries, it's possible that multinational miners such as BHP Billiton -- which is headquartered in Australia but has a major office in London -- would eventually be affected.

The counter-arguments
There is a strong counter-argument that the benefits to multinational companies of being based in Britain, in particular the access that this gives to the capital markets, will outweigh the costs of the judgment so companies should simply treat it as a cost of doing business.

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