The GULS Law Review

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Commercial Law

What’s So Funny About Parody?: Reviewing the CDPA’s Latest Exception to Copyright Infringement

February 15, 2017

In this article, Jordan Rhodes (4th year LLB) traces the still relatively new exception to copyright infringement where the use of a work is for the purposes of parody. The analysis ultimately recognises that parody is an inherently vague and subjective concept, and offers a perspective from both an owner's economic copyright as well as an author's moral rights...

 

 

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Analysis of the requirements for the grant of a European Account Preservation Order

October 16, 2016

In this article, Anna Owens analyses the requirements for the grant of a European Account Preservation Order with reference to the equivalent rules in Scotland. 

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In a global market, mergers and concentrations involving foreign companies could extend the anti-competitive effects to other part of the world outside where they originate.

October 10, 2016

In a global market, mergers and concentrations involving foreign companies could extend the anti-competitive effects to other part of the world outside where they originate. To tackle these effects, competition law regimes tend to assert jurisdiction extraterritorially. America is the first country to establish the ‘effects doctrine’ to extend its jurisdiction to the concentration involving foreign companies. Similar to US, EU hold that the European Merger Regulation is applied extraterritorially when the merger is above a certain threshold. This approach could be beneficial to the interests of domestic industries and consumers as it could prevent the potential anti-competitive harm caused by the concentrations. However, it could cause legal conflicts between different regimes, and bring uncertainty to and increase financial and staff costs of foreign companies.

In the article, Zongjin Li seeks to identify the advantages and disadvantages of assertion of extraterritorial jurisdiction on merger control. A further aim of this essay is to give possible suggestions to decrease the legal conflicts between different regimes and the costs of multiple notifications. For these purposes, firstly, the legislations and legal practice of US and EU will be introduced, then the benefits and problems of extraterritorial assertion of jurisdiction on merger cases are demonstrated, and then possible suggestions are proposed. Finally, a conclusion will be given.

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The New Paradigm for Fairer Taxation of Multinational Enterprises in the European Union: Corporate Tax Avoidance and the Need for Greater Transparency

June 14, 2016

John Gillespie, 4th Year LLB, discusses the need for greater transparency regarding corporate tax avoidance and the new paradigm for fairer taxation of multinational enterprises in the European Union.

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The Extent to Which the US and the EU assert Jurisdiction over Mergers Involving ‘Foreign’ Companies

June 4, 2016

Merger control is an important element of the regulation of competition and market structures, and mergers of transnational companies are often reviewed by multiple authorities as a result of globalisation.

In this article, Patricia Einfeldt considers the extent to which the United States and the European Union assert jurisdiction ofver mergers inovling 'foreign' companies.

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Extraterritorial Jurisdiction under European Union and Chinese Merger Control Regimes

January 18, 2016

Aristi Zaimi, a Postgraduate student studying International Commercial Law, analyses the extra-territorial jurisdiction under both European Union and Chinese merger control regimes, providing a comparative outlook of the two legal systems.

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Banker/Customer Relationship

December 28, 2014

Justin Curcio discusses the duty of confidentiality in the relationship between banker and customer. This traces the root of the duty of confidentiality to the law of contract, as discussed in the landmark case of Tournier v National Provincial and Union Bank of England. The author compares the duty in England with the duty in the United States, and highlights the influence the decision of Tournier has had cross-jurisdiction.

 

 

I have no doubt that it is an implied term of a banker's contract with his customer that the banker shall not disclose the account, or transactions relating thereto, of his customer except in certain circumstances.

                                                                        -Sir Thomas Scrutton, L.J.

 

People seek to become a customer of a bank because of the reputation it has in the community. Banks are held to a higher standard than the average moneylender because of the responsibility it takes on and rights bestowed to it by the government.[1] A customer’s relationship with a bank is more than just opening an account. It may involve insurance, loans, retirement or a number of other financial transactions. Accordingly, a bank has a certain reputation in the community of trust and confidence, which the public can readily distinguish from a common moneylender.[2] This public recognition is one of the fundamental characteristics of what makes a bank a bank.[3] Due to this public reputation, a bank is bestowed with rights, obligations and duties towards its customers that are not required of other establishments.

A bank has a reputation in the community as a secure financial institution, and as such, has certain duties towards its customers.[4] One of the utmost duties is that of confidentiality.[5] Furthermore, this duty of confidentiality owed by the bank does not dissolve once an individual ceases to be a customer.[6]

These principles of the banker/customer relationship have been embodied in the Court of Appeal’s decision in Tournier v National Provincial and Union Bank of England.[7] In this case, Tournier’s bank contacted his employer seeking an address.[8] The bank then unnecessarily informed Tournier’s employer that he was in debt to the bank and was sending money to a bookmaker.[9] Due to this information, Tournier’s employment contract was not renewed.[10] The Court held that a bank has a qualified legal duty to not disclose such personal information.[11] This duty of confidentiality arose out of contract.[12] The Court of Appeal reached this conclusion by looking at the custom and practice of banking, which supported the belief that the bank did owe its customers a duty of confidentiality.[13]

However, a bank’s duty of confidentiality is not absolute.[14] A bank may disclose otherwise confidential information if compelled by law, if a public duty arises, in circumstances in the interests of the bank or if the client gives consent.[15] In Shah v. HSBC Private Bank (UK) Ltd[16], the Court acknowledged that HSBC had a duty to its customer but it also had a legal duty to not be involved or assist in money laundering. A bank is required to report a customer if it believes that customer is involved in money laundering. Accordingly, HSBC reported Shah to the Serious Organised Crime Agency (“SOCA”) because of its suspicion of Shah being involved in money laundering.[17] Additionally, HSBC was required by law to freeze Shah’s assets and not “tip [him] off” about SOCA’s investigation.[18] HSBC did not follow through with Shah’s request to transfer funds and provided no reason for its inaction.[19] The Court held that when a legal obligation of a bank arises, the bank owes no duty to its customers to disclose information about their account, when such disclosure may violate a legal duty of that bank.[20]

 

United State’s Banker/Customer Relationship

The United States’ banker/customer relationship is similar to that of the United Kingdom. The relationship is also considered to be one rooted in contract, thus is constructed on the law for the state that has jurisdiction in the matter.[21] Even though the relationship is defined on a state-by-state basis, the general principles of the banker/customer relationship are universal throughout the country.[22] United States’ courts and scholars frequently refer to Tournier as the quintessential case on the issue.[23]

Similar to Tournier, United States’ courts have recognized that there is a duty of confidentiality between the banker/customer.[24] Furthermore, this duty of confidentially is qualified and a bank can disclose otherwise confidential information if the customer gives consent (which may be implied), is required by law or if circumstances give rise to a public duty to disclose.[25] In the United States, there is not necessarily a fiduciary duty between the banker/customer, but one may be established when the banker/customer relationship compels the customer to act comfortably and disclose information he would not ordinarily disclose.[26] For example, in Dolton v. Capitol Federal Savings and Loan Association[27], Dolton wished to purchase property from seller. He informed his bank that the seller orally agreed to sell the land in return for installment payments.[28] Dolton’s bank then went out and paid cash for the land from seller at less than the asking price.[29] The court held that this could be considered a breach of fiduciary duty because Dolton entrusted the bank with personal information that it used for personal gain.[30] The United States recognizes the banker’s duty to be one of confidentiality between it and the customer. Moreover, that duty of confidentiality may evolve into a fiduciary duty if the customer reasonably entrusts the bank with additional personal information.

Conclusion

Once an individual becomes a customer of a bank, the bank owes that customer a duty of confidentiality. This is in part because a bank holds itself out in the community as a reputable institution that is entrusted with the financial securities of its customers. A bank does far more than just keep money safe. A bank can secure investments, loans, give commercial advice and provide various other fiscal services to the community. Banks have a higher standard of care than other (non-banking) lenders; in return, the government bestows to them certain privileges—granting banks statute protections and rights.

The landmark case of Tournier helps define what that standard of care and relationship is between a bank and its customers. The relationship is one that gives rises to a duty of confidentiality, which can only be breached in certain situations. When understanding the relationship between the banker and customer, the reasoning and holding in Tournier are not only recognized in the United Kingdom, but also looked to for guidance throughout the world. This precedent setting 1924 case changed the banking industry on a global level; defining and strengthening the banker/customer relationship.



[1] United Dominions Trust Ltd. v. Kirkwood, 1966 2Q.B. 431.

[2] ibid. 456.

[3] ibid.

[4] Tournier v National Provincial and Union Bank of England, 1924 1KB 461. Tournier is a precedent setting case that established the basic fundamentals of what a banker/customer relationship is.

[5] ibid., 473.

[6] ibid.

[7] ibid., 461.

[8] ibid., 462.

[9] ibid.

[10] ibid.

[11] ibid.

[12] ibid., 471–72.

[13] ibid., 461.

[14] ibid., 471–72.

[15] ibid.

[16] [2012] EWHC 1283 (QB). A bank owes a duty to the customer to follow his or her mandate.

[17] ibid.

[18] ibid., para. 32.

[19] ibid., para. 15.

[20] ibid., para. 238–39.

[21] See Indiana National Bank v. Earl Chapman, 482 N.E.2d 474, 482 (Ind. 2d 1985).

[22] Huhs, Roy E., “To Disclose or Not to Disclose Customer Records,” 108 Banking L.J. 30 (1991).

[23] ibid. 31., see Northern Trust Co. v. Peters, 69 f.3d 123, 130–31 (11th cir. 1995).

[24] Peterson v.  Idaho First National Bank, 83 Idaho 578, 586 (Idaho S.Ct. 1961).

[25] ibid. 588

[26] Dolton v. Capitol Federal Sav. And Loan Ass’n, 642 P.2d 21, 23 (Co. Div. II 1981).

[27] ibid. 22.

[28] ibid.

[29] ibid.

[30] ibid. 24. Case was remanded for factual consideration

Signature Changes: The Introduction of Execution in Counterpart into Scots Contract Law

October 30, 2014

This article discusses the possible introduction of execution of counterpart into Scots law by the Legal Writings (Counterparts and Delivery) (Scotland) Bill 2014. Currently Scots contract law requires all parties to a transaction to sign the same physical document, and the provisions of the Draft Bill introduces a new mechanism to Scots law, familiar in England, execution in counterpart. This would allow parties to send documents to each other by electronic means and reduce costs, and time delays, in commercial transactions. This article will involve a detailed analysis of the provisions of the Bill, their practicalities for solicitors in practice, and the perceived deficiencies at Scots law at present leading to it's introduction.

Written by Robert Oates, Diploma student and sub-editor of the Commercial Law portion of the Review. 

 

At present, if a written contract is to be validly executed in Scotland then both parties must sign the same physical copy. This is in contrast to the position in English law where each party may sign their own copy, a counterpart, and then exchange it with the other party (or parties)[1]. Therefore a commercial solicitor in England is clearly in a preferable position whereby clients can conclude contracts remotely on the same day, without having be present at the same place at the same time. However, under Scots law, in order for a contract to be probative which parties to sophisticated commercial transactions will require the subscription of all parties upon the same contractual document, plus the signatures of witnesses, is required[2]. This situation is clearly impractical for Scottish solicitors and clients, where there is a lack of clarity as to good practice and has led to a number of impracticable solutions.

 

During a consultation carried out by the Scottish Law Commission the difficulties encountered by Scots practitioners were recognized, detailed analysis of the law at present was conducted and recommendations were made. These recommendations fell into a larger mandate by the SLC to examine Scots contract law and the continuous attempts to incorporate electronic signatures into Scots law. On 14 May 2014 the Legal Writings (Counterparts and Delivery) (Scotland) Bill[3] was introduced to the Scottish Parliament following a Report[4] earlier this year from the SLC. The Bill is currently sitting at its First Reading and may, therefore, be subject to further amendment.

 

A Lack of Clarity in the Law

The SLC Report did recognize that, excluding requirements of probativity, it is possible to argue that Scots law recognised the possibility of execution in counterpart. However this argument is based on eighteenth century sources, and is not widely recognized, nor accepted, within the profession[5]. Ultimately it is preferable for change to be introduced through legislation to create a framework and establish limits on the capacity for this mechanism of concluding contracts.

 

The perceived inability to utilise execution in counterpart as a mechanism of delivery has led to some unusual solutions in practice. These include endless expense through courier companies and postal fees to send a physical document to various locations and the use of English law as an alternative to Scots law, for the sake of commercial expediency. It is clear the law as it stands has become dated and possibly restrains trade.

 

What about Electronic Signatures?

The need for introduction of execution in counterpart is perhaps somewhat overshadowed by the modernisation of Scots law introduced by the provision execution of electronic documents by electronic signatures in Part 3 of the Requirements of Writing (Scotland) Act 1995[6]. This permits parties to deal entirely in electronic documents, whereby parties (or their solicitors as agents) can apply their electronic signature to the agreed electronic document wherever it is. However, since there is no secure electronic document exchange facility at present, this provision sits stagnant awaiting a process in which it can be utilised. Therefore introduction of the Draft Bill would provide a superior mechanism for parties in certain transactions, particularly where parties are not located in close proximity. For example for a large multi-national commercial transaction the alternative options permitted at present under Scots law are a round robin style delivery to all parties or alternatively all parties would need to meet for a signature session. The Draft Bill includes provision for electronic documents and traditional documents.

 

The Draft Bill as Introduced

The Draft Bill creates a clear framework by which a document executed in counterpart will be effective under Scots law[7]. It should be noted that this framework includes a mechanism for which documents created physically on paper (termed “traditional documents”) can be regarded by electronic means for the legal purpose of concluding a contract.

 

Section 1 of the Draft Bill confirms the validity of execution in counterpart[8], and recognises the traditional multi-party mechanism is unaffected[9]. Section 1 Subsection 2 explains that execution in counterpart is the process whereby a document is signed by more than one party and both parties subscribes it’s own copy (“counterpart”) of the document, provided that each counterpart is a duplicate with the other. The counterparts can be signed at different places at different times. Once this execution takes place, the counterparts are to be treated as a single copy[10]. The document becomes effective upon delivery[11]. Delivery is not defined within the Bill, therefore the pre-existing law continues to apply, however the draft bill provides the requirement that the counterpart must be delivered to every other party whose signature is not on that counterpart[12], or a person nominated to take delivery or one, or all, of the counterparts[13]. Therefore execution in counterpart is subject to the pre-existing requirement of Scots law that written documents must be delivered to become effective. In this way, the general law is unaffected, and the Bill provides an additional mechanism of delivery. The Draft Bill stipulates that a document must continue to conform to any other requirements required for it to become effective[14], to ensure cohesion with the present law.

 

The addition of subsection 9 permits parties to control the date and date at which the counterpart is to be delivered, as an exception of subsection 5. Therefore parties could reach an agreement that the document is considered executed at a more specific, defined date, than the date at which possession is transferred to the parties to whom the counterpart must be delivered. This permits parties to receive a counterpart, hold it as undelivered, until a suspensive condition, for example, has been met.

 

Section 1 Subsection 3 provides that once the counterparts are executed they are deemed to form a single document, and this document can be made of a collated version of one entire counterpart combined with the pages of the other counterparts that have been subscribed. In this way, each party to the document can subscribe their counterpart, with a witness to ensure the probativity, and then the described collated document can be registered in Books of Council and Session. This simplifies registration and searching in the register, particularly where there is a complex multi-party contract being concluded.

 

Section 2 of the Bill sets out the legal framework where the parties decide to deliver documents to a nominated party[15]. Effectively one individual can effectively act as the administrator for the signing process, increasing commercial expediency. The nominated person may be one of the parties or an agent of them. A nominated person is under a duty to hold and preserve the delivered counterparts for the benefit of the parties involved.

 

Section 3 provides that the first two sections apply to electronic documents. Therefore the Bill clarifies that it is competent to execute an electronic document in counterpart (with the possibility of nomination). Given the fact that electronic signatures have yet to be fully fleshed out, as discussed above[16] the utility of the provisions at present await further developments. However, where the electronic documents do not require writing the parties are at liberty to determine, and agree, what kind of electronic signature is sufficient to constitute subscription in counterpart. This leaves the possibility for Scottish solicitors to develop a mechanism in practice. The practicalities of this are unclear at present.

 

Section 4 clarifies the mechanism for delivering a traditional document. This is achieved by delivering a copy of the document[17] or a part of the document[18] by electronic means, which could include email or fax. Therefore Section 4 creates a new mechanism for delivery for legal purposes by allowing documents to be considered validly executed following delivery using technology as a vessel. If an individual is to collate the document, however, he must obtain the pages actually signed by the parties involved. Therefore for major commercial transactions, it would be preferable if an electronic signature system could be introduced, as the continual need to send physical documents remains a burden. Section 4 Subsection 3 provides that if only part of the document is delivered then it is subject to two requirements. Firstly, it must be clear that the delivered counterpart is part of the document which has been subscribed and, secondly, it must contain the page with the subscription. The parties have the freedom to decide amongst themselves the electronic means of delivery[19]. This could include fax or a PDF file attached to an email. If the parties fail to come to an arrangement then the question of what is to be delivered will be what is reasonable for the recipient to receive, viewed objectively in all the circumstances[20].

 

A Look to the Future

It is unclear at present what, if any amendments, will be made to the Draft Bill as it passes through the Scottish Parliament. The introduction of execution in counterpart to Scots law is one of a number of incremental changes occurring to contract law in an attempt to ensure that the law is up and keeping with commercial transactions and technological developments. Given the endless search for an adequate system of electronic signatures the use of execution in counterpart may provide a useful mechanism in the interim for the conclusion of commercial contracts.



[1] C. Hood, ‘Execution in Counterpart in Scots Law’ 2014 Abstract

[2] Scottish Law Commission, ‘Discussion Paper on Formation of Contract’ 2012 SLC DP 154

[3] Scottish Parliament. (2014). Legal Writings (Counterparts and Delivery) (Scotland) Bill.Available: http://www.scottish.parliament.uk/parliamentarybusiness/CurrentCommittees/77771.aspx. Last accessed 20th Oct 2014.

[4]  Scottish Law Commission, ‘Report on the Formation of Contract: Execution in Counterpart’ 2013 SLC 231

[5] Smith v Duke of Gordon 1701 Mor 16987

[6] Introduced by the Land Registration etc (Scotland) Act 2012, s97

[7] Legal Writings (Counterparts and Delivery) (Scotland) Bill Explanatory Notes

[8] Legal Writings (Counterparts and Delivery) (Scotland) Bill SP Bill 50, s1(1)

[9] ibid, s1(2)

[10] ibid s1(3)

[11] ibid s1(5)

[12] ibid s1(6)

[13] ibid s1(7)

[14] ibid s1(5)(b)

[15] ibid s2

[16] It is unclear at present what an advanced electronic signature is, as required by the Electronic Documents (Scotland) Regulations 2014 (SSI 2014/83)

[17] Legal Writings (Counterparts and Delivery) (Scotland) Bill SP Bill 50, s4(2)(a)

[18] ibid s4(2)(b)

[19] ibid s4(4)

[20] ibid 4(5)

 

 

Hiding Behind Subsidiaries: Holding Parents Liable

January 10, 2014

Written by Douglas Kerr (Professional Diploma in Legal Practice)

 

Introduction

There is increasing concern over the power and influence of companies and their involvement in ‘wide-scale unethical and illegal activities’[1] that result in environmental and social damage to local populations. For example, claims against mining companies for causing silicosis in South Africa[2] or the alleged environmental damage by the actions of oil companies in the Niger Delta.[3]  Of particular concern is the use of separate corporate personality and limited liability by parent companies to avoid accountability for the actions of their subsidiaries. In some cases subsidiaries may no longer exist, or it may be that they do not have the resources to pay damages claims. This leaves victims without a sufficient remedy if they cannot hold parent companies liable where appropriate. However, there are methods of redress, an understanding of which is essential not only for victims but for parent companies wishing to insulate themselves from the actions of their subsidiaries.

Limited Liability

Limited liability is a core concept of company law and refers to the fact that shareholders are only liable to the extent of the amount unpaid of their shares.[4] This encourages economic growth by enabling shareholders to invest in a company free from the risk of creditors reaching their personal assets. It also encourages creditors to be more aware in investment decisions and to conduct proper due diligence as they cannot retrieve assets from members, only from the company.[5] Limited liability is wrapped in the principle that the company enjoys legal personality distinct from its members, meaning it can be the bearer of rights and duties separate from its members.[6] This division between member and company is termed the ‘corporate veil.’

Limited liability and separate corporate personality apply equally in cases where a company becomes a shareholder in another company, creating a parent – subsidiary relationship where there is a controlling interest.[7] The parent is protected through limited liability from liabilities incurred by even wholly-owned subsidiaries because subsidiaries hold separate legal personality.[8]

However, this does not mean that a parent has the authority to dictate the actions and direction of its subsidiary. The constitutional positions of members and the board of directors are distinct and generally members have only limited capacity to make decisions, with duties and responsibilities of directors and shareholders detailed in the Companies Act 2006. A parent can use its vote to select the board but without formal internal group procedures their official power as regards the subsidiary ends there. The subsidiary’s directors, ‘are not agents…bound by the instructions of a principal’[9] parent company. Nevertheless, with a controlling interest a parent company can ‘dominate…the general meeting’[10] and effectively appoint the subsidiary’s directors. Thus, a relationship of control underlies the formal spheres of influence of the two company boards, in that the subsidiary’s directors owe their positions to the parent company. This ‘finds its expressions in the confidential directions issued by the controlling shareholders and with which the directors spontaneously comply’[11] and it may be that the principles of separate corporate personality and limited liability are used to shield the parent from liability when it actually exerts a degree of control over the activities of the subsidiary. There is thus a danger that the protection of the corporate veil can enable parent companies to escape accountability for their role in ‘morally and socially unacceptable’ harm caused by companies.[12]

Piercing the Veil

The reality that rules of corporate structure can be used to escape liability and result in injustices can be remedied by what is known as ‘piercing the corporate veil’ where courts will look behind the veil of incorporation, holding members liable for the company’s debts/conduct. The effect of this is that separate legal personality may be ignored and a parent held liable for the conduct of its subsidiaries. In some circumstances there is a form of statutory veil lifting, for instance group accounting requirements to create transparency for tax purposes.[13] This makes it harder for companies to hide evidence of economic crimes, corruption, bribery etc. by transferring assets within the group. Group accounting reports can also be used to prove the involvement of the parent in a subsidiary’s conduct by tracing funds.

Adams v. Cape Industries[14] is the leading authority on piercing the veil. It concerned enforcement of a US court judgment against the UK domiciled Cape Industries for personal injuries arising out the use of asbestos. The link to America was Cape’s US domiciled marketing subsidiary. The UK court developed three bases for piercing the veil.

Firstly, if the case turned on the interpretation of a statute or document that would require the group to be treated as a single unit.

Secondly, if there was a sham or façade behind the corporate structure, which was hiding what should actually be a single company. This is where the separate legal personality exists purely and deliberately to facilitate an injustice and avoid a known and existing (or confidently predicted) liability. However, designing a corporate structure to lessen liabilities in general is lawful and while it may be considered immoral, it will not alone justify piercing the veil.[15] This has been relaxed to an extent in subsequent cases where it is alleged a company was incorporated to hide true ownership of assets.[16]

Thirdly, by applying a form of agency to the corporate structure with the effect that the parent is principal to an agent subsidiary. The agency agreement can either be express or implied through the conduct of the parties. When the purpose behind the group structure is to avoid liabilities between group members then it is unlikely an express agency agreement will exist and it can be difficult to establish an implied agency agreement.[17] There may however be formal internal procedures within a group that amount to such. If such a relationship can be found and the subsidiary was acting within its actual and apparent authority, the conduct of the subsidiary would bind the parent irrespective of limited liability. Adams set a high standard of control – requiring day-to-day parent involvement.[18] The court held that none of the above applied to the facts in Adams. Applying the principle of separate corporate personality, the court held that Cape Industries was not present in America and was therefore not subject to the jurisdiction of US Courts.

Liability under the law of Negligence

Under Adams it is only in narrow circumstances that a subsidiary can create liabilities for its parent company. There have however been developments since Adams that deal with the level of operational control by the parent. In the recent case of Chandler v. Cape[19] an employee of a subsidiary sued the parent after he contracted asbestosis. The court conducted a detailed examination of company documents and practices, finding that: a group medical adviser was responsible for the health and welfare of all employees within the group, that employees of the parent investigated illnesses (arising from asbestos) of employees of the subsidiary, that working practices were adopted by the subsidiary from the parent, and that many aspects of the overall production process were discussed by the parent board and ‘when it felt appropriate the Defendant [parent] did control’[20] what the subsidiary was doing. By retaining overall responsibility for health and safety, a direct duty of care was created between the parent and the employees.[21] This was not a piercing of the veil, but rather an alternative – attaching direct liability under the law of negligence through the parent’s involvement in the affairs of its subsidiary. This creates a relationship between parent and victim rather than ignoring the separate legal personality of parent/subsidiary. Importantly, day-to-day control was not required for the duty of care to attach. Instead, sufficient control over  the subsidiary's health and safety policy created the duty. In these circumstances the parent and subsidiary are presumably jointly liable. The judgment has since been upheld by the Court of Appeal.[22]

Thus the liability of the parent for the conduct of the subsidiary engages when a sufficient level of control over the policies and actions of the subsidiary creates a duty of care. However, exactly what amounts to control is unclear, with US and Australian authorities showing ‘few cases accepting that the parent will be liable even where there is a high degree of integrated management.’[23] This route is also predicated on adducing sufficient evidence of this control, which can be a very difficult task.[24] Still, the importance of the ability to seek remedy from the parent is highlighted by the fact that in Chandler the subsidiary company no longer existed, and that even if it had, it had no insurance policy to indemnify against asbestos related claims. Being able to target parent companies will also result in potentially larger pots for compensation. The judgment has opened up a much-needed route of redress for employees of subsidiary companies.

However, there is the danger that the judgment in Chandler will be limited to employees and that it will not extend to more remote third parties, such as a local population. Further litigation will be required for a firm answer, but in Lubbe v Cape,[25] both employees and nearby residents of Cape’s wholly owned South African subsidiary sued in UK courts. The case was settled out of court but the fact that it survived a forum non-conveniens challenge implies that UK courts were willing to entertain a claim from non-employees seeking to establish that the parent owed them a duty of care.

Concluding Remarks

It is a long standing and core principal of company law that parent companies enjoy limited liability and separate legal personality from their subsidiaries. This encourages investment, and also facilitates multi-national companies operating in numerous States to do business. The corporate veil can be pierced under the Adams test but an overly restrictive application means that parent companies can too easily avoid liability for personal injury or environmental harm caused by their subsidiaries. The UK takes the approach of starting with the Salomon principle of separate legal personality and then determines if it is appropriate to depart and attach liability to the parent.[26] Some commentators consider the application of limited liability within group structures as an over-extension of the Salomon principle.[27] Muchlinski advocates a presumption of parent liability for the whole group, which can then be rebutted with ‘conclusive proof of the independence of the subsidiary’[28] However, this risks eroding the principal of separate corporate personality too far.

A balance needs to be found to allow redress for victims while still maintaining the advantages of separate corporate personality. The approach taken in Chandler will be helpful in striking this balance. It allows victims to seek remedy from parent companies under the law of negligence but only where there is sufficient operational control by the parent over the subsidiary. Thus parents will only be held to owe a duty of care when the group is a de facto single entity and where it is appropriate that separate legal personality should not prevent redress. Chandler is thus of significant importance for this area.

 



[1] A.Clapham, Human Rights Obligations of Non-State Actors, (2006), 201

[2] Leigh Day, Gold Mining Silicosis, available: http://www.leighday.co.uk/International-and-group-claims/Gold-mining-silicosis-(1) [accessed 30/12/13]

[3] Essex Business and Human Rights Project, Corporate Liability in a New Setting, (2012), available: http://www.essex.ac.uk/ebhr/news/default.aspx [accessed 30/12/13]

[4] Companies Act 2006 (CA), s.3

[5]P.Muchlinski, ‘Limited Liability and Multinationals Enterprises: a Case for Reform?’ 34(5) Cambridge Journal of Economics (2010), 915-928, 915

[6] Salomon v. Salomon & Co [1897] AC 22

[7] CA, s.1159

[8] A.Dignam & J.Lowry, Company Law, 5th edn., (2009), 32

[9] F.Galgano, ‘The Allocation of Power and the Public Company in Europe’ in Dury and Xuereb (eds.), European Company Laws: A Comparative Approach, (1991), 85-101, 97

[10] Ibid, 92

[11] Ibid, 97

[12] Muchlinski supra, 916

[13] CA, ss.399-400

[14] [1990] Ch.433

[15] Ibid, 544

[16] Raja v. Can Hoogstraten [2006] EWHC 2564

[17] Dignam & Lowry supra, 40

[18] Adams supra, 538

[19] [2011] EWHC 951 (QB)

[20] Ibid, §61

[21] Ibid, §75

[22] [2012] 1 WLR 3111

[23] Muchlinski supra, 922

[24] Ibid, 919

[25] 2000 UKHL 41

[26] J.Zerk, Multinationals and Corporate Social Responsibility (2006), 55

[27] Dignam & Lowry supra, 49

[28] Muchlinski supra, 924

Creating a Corporate Conscience

January 10, 2014

 

Written by Emma Flood (Professional Diploma in Legal Practice)

 

 

 

In a rapidly changing world, the law has been unable to keep pace. National laws are unable to regulate the conduct of multi-national corporations because of territorial limits, and international law fails to recognise the multi-national corporation as an entity capable of being held accountable for inflicting or enabling human rights abuses. The term ‘Corporate Social Responsibility’ (CSR) has become synonymous with human rights protection. However, in practical terms the concepts are very different. Whilst CSR initiatives are commitments entered into by companies voluntarily, human rights protection needs a comprehensive and mandatory legal framework to successfully protect the most vulnerable from corporate abuses. This article considers the patchwork legal construct in UK law for protecting human rights from businesses and encouraging companies to be respectful of the social background in which the operate.

Disclosure Requirements

Disclosure requirements may persuade companies to act in a socially responsible manner as a result of the influence disclosure will have on consumers and investors.[1] However, disclosure requirements suffer from lack of effective enforcement. Furthermore, the level to which companies are required to disclose is unclear and far from comprehensive.

The Companies Act[2] s.417 provides for an ‘Enhanced Business Review’. This means that companies must make statements on environmental matters, employee matters, social and community issues including the company’s formal policy on those issues, and how effective that policy is. However, the wording of s.417 implies that if, in the good faith view of the directors, the information is not necessary to gain an understanding of the ‘development, performance or position of the companies business’, it may be left out of the Business Review.  This exemplifies the lack of clarity in meeting disclosure requirements, which may allow companies to avoid including any information which may negatively impact their reputation. This essentially undermines the protection intended to be provided by the provision.

The provisions are enforced by the Financial Reporting Review Panel (FRRP). However, the panel has been criticised for being overly secretive and lacking any real force. For example, legal campaign group ClientEarth lodged a complaint with the FRRP, claiming that mining company Rio Tinto had failed to adequately disclose its environmental impact, in line with the requirements of the Companies Act.[3] The FRRP concluded that Rio Tinto had in fact been in breach of reporting requirements. The brief report issued by the FRRP merely stated that Rio Tinto would be including sufficient information in their subsequent annual business review.[4] This is an example of one of the main concerns surrounding business and human rights; lack of effective enforcement.

However, the real pressure on companies lies in forces of the market, brought about by reputational risk. Shareholders will be dissuaded from investing in companies with a reputation of adverse environmental impact or subsidiaries involved in human rights abuse in third states. This is not only for moral reasons, but also as a matter of investment return. Consumers are sensitive to a company’s reputation, and this may have a significant effect on the prosperity of the company. For example, a study of ethics in the market showed that 70% of consumers surveyed have decided not to buy products from a company they believe to have questionable ethics.[5] The reverse trend is also significant, when Marks & Spencer changed all 38 of their tea and coffee products to their Fair-trade counterparts they noted a 27% rise in sales in just 3 months.[6] This evidence indicates the influence the Enhanced Business Review can have on consumer preferences, investment choices and on business practices. However, this provision would be more effective with greater clarity of what should be provided in the review, higher levels of non-financial disclosure and companies in violation of the requirements being dealt with more strictly.

Disclosure is a persuasive method, fostering a CSR culture and encouraging companies to respect human rights. However, disclosure cannot hold companies directly accountable for human rights abuses and provides no redress for victims.

Enlightened Shareholder Value and Director’s “success” Duty

Another principle within the Companies Act attempts to reconcile the objectives of company law with the wider community in which a company operates. Prior to the enactment of the Companies Act 2006 the Company Law Review, when discussing in whose interest a company should be run, preferred the “enlightened shareholder value” approach.[7] This model recognises that while the duty of directors is to maximise profits for shareholders, this is not best achieved by making short-term business decisions to achieve short term profits. The enlightened approach requires companies to take into account the wider environment in which the company operates, maximising relationships with other stakeholder groups such as customers, employees, the community and the environment, in order to fully realise the company’s potential for profit and successful long-term sustainability. This approach has materialised in s.172 of the Companies Act which provides; ‘A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole’.

As a result a director must consider the long term consequences of decisions, including employee matters, business relationships, the impact of the company on its operating environment, reputation and fairness. This is not an exhaustive list but merely provides areas of particular importance that should be borne in mind by directors.

However, although the Government has stated that the s.172 provision ‘marks a radical departure in articulating the connection between what is good for a company and what is good for society at large[8], this provision in practice does not provide for the more stakeholder inclusive method of decision making as was originally envisioned. In the Scottish case of Re West Coast Capital,[9] it was stated that s.172 did not confer a more substantial obligation on directors and merely codified pre-existing duties under pre-2006 common law. This undermines the idea that the new duty would purposefully contribute to the enlightened shareholder value principle, and promote more responsible corporate behaviour.

Furthermore, it is important to take into account enforceability of directors duties. Director’s duties are owed to the company and therefore can only be enforced by the company, shareholders acting on behalf of the company through the derivative procedure or by a liquidator in the event of winding up. Thus, while the duty may persuade directors to take into account social issues and the interests of other stakeholders, they cannot be held directly accountable by third parties for not taking such considerations into account. Again, a potentially positive contribution to the human rights and business framework is undermined by a lack of effective enforceability.

Furthermore, it is important to note the subjective nature of the duty. In the case of Cobden Investments Ltd[10] it was noted that the s.172 duty to ‘ act in the way he [the director] considers, in good faith...to promote the success of the company’ should be interpreted subjectively, as the previously un-codified duties to act bona fide in the interests of the company were.

In addition, the s.172 duty does not require that the director act in the interests of the example matters listed in the section; it merely requires that they have considered them when making their decision. Essentially this means that as long as the director can prove that these matters were taken into account, they will not have acted in breach of their duty. This makes the provision particularly weak in contributing to protection of third party human rights and good corporate citizenship. In addition, there is no requirement for any formal procedure to ensure that directors have taken into account the issues identified. This is a failure on the part of the UK Government to require that companies establish procedures ensuring due diligence on the part of directors, and is again a weakness in enforcement and ensuring compliance with the law.

Contract

Companies often have their reputations tarnished for the actions of their suppliers or joint venture partners. Many companies thus include a code of conduct in the terms of contracts negotiated with both external suppliers and subsidiaries, with particular provisions and requirements relating to human rights and CSR standards.[11]Again, this works in partnership with market influence as in order to secure business relationships with large companies, smaller suppliers will need to be able to meet and adhere to their human rights and CSR standards.

The Government is also able to use their market power to secure CSR standards in their procurement contracts. The UK Government has great market power with procurement spending amounting to nearly £220 billion per year.[12]This gives the Government superior contractual power to influence suppliers. Furthermore, the Government is further being held to account on procurement contracts by non-governmental organizations (NGO’s) using the Freedom of Information Act[13] to find out about Government procurement contracts and potential human rights and environmental issues that may arise as a result.

However, the state is increasingly contracting out what should be public functions, which when carried out by private bodies are potentially outside the reach of the framework for human rights protection.[14] One of the most contentious issues surrounding the Human Rights Act (HRA) is its application under s.6(3) to companies carrying out a ‘public function’. The term is not defined in the HRA and the narrow interpretation and reasoning of the courts of ‘public function’ through a series of cases, has created a significant gap in the regulatory framework. This was highlighted in the case YL v. Birmingham City Council.[15] The court had to decide whether Southern Cross Healthcare, who operated a privately owned nursing-home business, were carrying out a ‘public function’ for the purposes of section 6(3) of the HRA. The House of Lords decided that Southern Cross were not. This decision proved to be unpopular and problematic, and to remedy the immediate problem the Government introduced amending legislation to the effect that the provision of publicly funded residential care in privately owned care homes is a public function for the purposes of the HRA.[16] However, this legislative attempt affects only one area of private provision of a public function. The House of Lords noted their concern in their report assessing the Health and Social Care Bill, that while this remedied the immediate problem, it did not address the broader issue of the scope of the meaning of a public function. This provides a further example of the patchwork nature of the legal construct, and the lack of clarity in the standards required.

Concluding Remarks

These are but a few examples of highlighting how the current legal framework concerning human rights and CSR compliance for companies is fragmented, conciliatory and inadequate. While there may be scattered mechanisms for holding companies accountable for disregard of human rights and the wider community, the UK Government presently lacks a coherent strategy to reconcile the often conflicting objectives of company and human rights law.

 

 

 



[1] D.McBarnett.‘Corporate Responsibility; Beyond Law,Through Law,For law’,(2009),University of Edinburgh Press,2009/03

[2] Companies Act 2006

[3] Client Earth, Referral to the Financial Reporting Review Panel Re: The Rio Tinto Group Annual Report 2008,

[4] Ibid

[5] D. McBarnett,‘Corporate Responsibility; Beyond Law, Through Law, For law’, (2009)

[6] Ibid

[7] Lady Justice Arden DBE, ‘Regulating the Conduct of Directors’(2010) Journal of Corporate Law Studies, Vol.10

[8] Introduction and Statement of the Rt. Hon Margaret Hodge, Department for Trade and Industry,Duties of Company Directors’, June 2007

[9] Re West Coast Capital (LIOS) Ltd [2008] CSOH 72

[10] Cobden Investments Ltd v RWM Langport Ltd [2008] EWHC2810 (Ch).

[11]  K.M. Amashi,O.K. Osuji and P. Nnodim, ‘Corporate Social Responsibility in Supply Chains of Global Brands: A Boundary less Responsibility? Clarifications, Exceptions and Implications’(2008) Journal of Business Ethics 81:223–234

[12] National Audit Office, ‘A Review of Collaborative Procurement Across the Public Sector’(2010)

[13] Freedom of Information Act 2000

[14] S. Palmer, ‘ Public Functions and Private Services; A gap in Human rights Protection’(2008), International Journal of  Constitutional Law Vol.6,585-604 ,2008

[15] YL v. Birmingham City Council [2007] UKHL 27

[16] Health and Social Care Act 2008, Section 145

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