Corporate Veil Lifting In Tort Cases
Most tort case will deal with damages for personal injury and property damage for negligence. The law of tort basically with compensation for four kinds of damage, injury or loss:
  • Damage for personal injury
  • Damage for property or property damage
  • Damage for economic loss
  • Damage for mental or psychiatric injury

However to a large extent the first two kinds, i.e. personal injury and property damage predominate. Given the kaleidoscopic nature of personal injury litigation and property damage, one will need to review of traditional authorities to grasp the approach of the court in corporate veil lifting in tort cases. A review of judicial authorities (case law) on corporate veil lifting in tort cases shows a trend away from normal court approach to veil lifting generally.

The court seems to be making a distinction between trade/commercial creditors and other kinds of creditors. Thus where normal trade creditors are concerned, the Salomon Principle can have unfortunate consequences but at least those creditors have the opportunity to assess the risk of doing business.

Employees or members of the public who are involuntary creditors may be at risk of the company causing them personal injury unlike trade creditors, who can secure their lending, they cannot protect themselves. As a result, the Salomon Principle can allow parent companies to avoid liability to involuntary creditors without providing compensation. The courts however seem to be aware that involuntary creditors need protection.

Another case involving Coupe Industries P/C will exemplify the courts approach. In Lobbe and Others v. Cape Industries P/C (2000) 1 Lloyd’s Rep 139 over 3000 employees and nearby residents of Cape Industry’s wholly owned asbestos mining subsidiary in South Africa commenced litigation claiming damages from the parent company in London for death and personal injury caused by exposure to asbestos at or near the mining operation in South Africa. The House of Lords found South Africa was the more appropriate place to sue, but the lack of legal representation and experts evidence required to substantiate the claims in South Africa would amount to a denial of justice.

The action could therefore proceed against the parent company in London. The court was reverted to the High Court for trial and in January 2002, Cape settled the action for £21 million. See also the case of Connelly v. RTZ Corp P/C (Mo 2) (1997) 4 AllER 335 in which the court would seem to have adopted an alternative legal approach to the problem, by-passing the separate legal personality issue by postulating a duty owed in tort by the parent company directly to the asbestos victims.

It would appear to be that where the tort is a commercial one, the courts are less likely to lift the veil of incorporation. In the case of Williams v. Natural Life Health Foods Ltd. (1998) 2 AllER 577 the issue concerned negligent misstatement. The managing director of National Life Health Foods Ltd. (NLHF) was also its majority shareholder. The company’s business was selling franchises to run retail health food shops. One such franchise had been sold to the claimant on the basis of a brochure that included detail financial projection. The managing director had provided much of the information for the brochure.

The claimant had not dealt with the managing director but with an employee of NLHF but subsequently brought an action against NLHF for losses suffered as a result of its negligent information contained in the brochure. NLHF subsequently ceased to trade and was dissolved. The claimant then continued the action against the managing director and majority shareholder alone, alleging he had assumed a personal responsibility towards the claimant. If the House of Lords found for the claimant then it had the effect of negating limited liability for the majority shareholder.

However, the judges seemed acutely aware of this in finding that a director or employee of a company could only be personally liable for negligent misstatement if there was reasonable reliance by the claimant on an assumption of personal responsibility by the director so as to create a special relationship between them. There was no evidence in this case that there had been any personal dealings that could have conveyed to the claimant that the managing director was prepared to assume personal liability for the franchise agreement. As such the veil of incorporation would remain in place.

These two cases are good examples of how the application of different legal principles can affect the Salomon Principle. As Adams v. Cape, the Court is principally concerned with whether the company is present in the United States as it could then allow enforcement of a foreign judgment. For the Court it represents a relatively straightforward application of the Salomon Principle.

Adams v. Cape, according to professor Gower, raised the issue in a sharp fashion. It concerned liability within a group of companies and the purpose of the claim to ignore the separate legal personality of the subsidiary was to make the parent liable for the obligations of the subsidiary towards involuntary tort victims. Thus, the case encapsulated two features – Internal group liability and involuntary group creditors – where limited liability is most in question.

As previously adumbrated the court had to decide in Adam v. Cape whether judgment obtained in the United States against Cape, an English registered company whose business was mining asbestos in South Africa and marketing it worldwide, would be recognized and enforced by the English Courts. In the absence of submission to the foreign jurisdiction, this depended on whether Cape could be said to be present in the United States. On the facts, the answer to that question depended upon whether Cape could be said to be present in the United States through its wholly owned subsidiaries or through a company (CPC) with which it had close business links. The court rejected all the arguments by which it was sought to make Cape liable.

In Lobbe and others v. Cape Industries P/C (2002), on the other hand, the Court is concerned with where the appropriate forum for a legal action was. If the Court found that the appropriate forum was the United Kingdom then tangentially this strikes at the Salomon Principle. Normally the Courts are acutely aware of these tangential effects as we observed in the Williams case above, but in Lobbe the involuntary creditor aspect seems to win the day. As a result we get an odd situation where a personal injury caused by a UK subsidiary operating in the US or any developed county will not give rise to any liability on the part of the parent. However, a personal injury caused by the subsidiary of a UK company in an underdeveloped jurisdiction will.

In some cases the courts are presented with circumstances where they are asked to lift the veil of incorporation because of a detrimental effects to a party to the action. In some instances there is fraudulent behaviour, in which case the court will usually lift the veil, however, most of the big cases fall short of fraud and are cases of deliberately avoiding liability through the use of the corporate form. There is usually moral culpability on the part of those behind the company, but nothing illegal. A legion of judicial authorities will show that at various points the Courts have been more inclined to lift the veil than others. Nevertheless it is crystal clear beyond any peradventure that currently the Adams case holds sway and thus the veil of incorporation is a rigid construct albeit the obvious difficulties the courts face when having to decide whether to maintain or disregard the veil of incorporation.