Ascription of Legal Responsibility to Groups in Complex Patterns of Economic Integration

Ascription of Legal Responsibility to Groups in Complex Patterns of Economic Integration

Hugh Collins * When am I responsible for the acts of another? As a general rule, never: I am not responsible for the deeds of others and deeds that are not my own. Even though these others may be intimates rather than strangers - members of my family, club, union, or community - the common law will not ascribe responsibility for their actions to me. The law constructs an atomistic conception of social relations, delimiting our legal responsibilities to our own acts and omissions, absolving us from blame for our brother’s wrongs.

This principle of personal responsibility sometimes appears to admit exceptions. Owner- ship or control of land may expand my responsibilities to include actions of others on my land, even trespassers and God.’ Sometimes the common law imposes a duty to control others, such as a teacher’s duty to keep a toddler out of the road or a prison authority’s duty to keep the prisoners incarcerated, and failure to perform this duty with care renders teacher and warder liable for the damage caused.2 And then again, I can be responsible for the actions of my chattels: my cows eating the neighbour’s corn. Yet these do not count as proper exceptions to the principle of personal responsibility in the homocentric eyes of lawyers. My responsibility remains personal; my liability arises from an omission to act in breach of a personal duty, from a failure to control trespassers, to restrain the child, to douse the fire started by a celestial thunderbolt; only the measure of my liability depends upon the acts of others. And as for my cows, why, not even Puss counts as a person in (modern) law, so the issue of responsibility for the acts of others does not arise.

But this simple picture described by the principle of personal responsibility must be coloured by one significant exception, which we may call the principle of group responsibility. Here we enter the realm of the firm: the organisation of productive relations. A group of individuals work together to produce commodities and services for sale in the market. Under the division of labour, each person’s actions contribute towards a common goal. The team acts as one, though like any team, there are captains exercising authority and squabbles about the distribution of rewards. But in these circumstances of collaboration and economic integration, to hold each person responsible for only his own actions, as the principle of personal responsibility requires, makes little sense. The defective product is the product of the team, and though the defect may spring from one individual’s carelessness, either in design or execution, it should be the responsibility of the group to establish an organisation which prevents such defects.

Accordingly, in the context of economic relations involving a division of labour and vertical integration of production, the common law frames legal responsibility in terms of the group. If the workers are business partners, then the law holds each partner responsible for the acts and omissions of the others. Similarly, one person, the owner of the means of production, often in a corporate form, will be identified as an employer and held responsible under the principles of vicarious liability for the actions of other workers, the employees, which cause harm to others. Instead of purely personal responsibility, the legal principle in the context of productive relations becomes one of the responsibility of the group, the capital unit, the business, or the firm.

*Brasenose College, Oxford. Support for this research was provided by the American Council of Learned Societies.

1 2

Smith v Littlewoods Organisation Ltd [1987] 1 AC 241; Goldman v Hargrave [1967] 1 AC 645. Carmarthenshire CC v Lewis [I9551 AC 549; Dorser Yachr Co Lrd v Home Ofice [1970] AC 1004.

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This practice of ascribing responsibility to groups challenges the atomistic premises of the principle of personal responsibility. Its subversion of the ideals of liberal individualism was taken so seriously in the German civil code that it expressly denied the possibility of the employer’s vicarious liability for the torts of employee^.^ The common law accepted the principle of group responsibility with grudging tolerance, whilst preserving simultaneously individual personal responsibility in tort.4 But it confined the firm’s liability to those occasions when the individual was acting as part of the group, in the course of employment, not on a frolic of his own; and for a time the shoddy exception of the fellow servant rule denied the benefits of group responsibility to workers in the firm. Doubts still remain with respect to holding the group criminally responsible for the acts of its rnember~.~ Nevertheless, the common law accepts as a rule the legal responsibility of the group, the unit of capital which organises production through a division of labour, for the acts of its members.

The principle of group responsibility normally functions by the recognition of a legal person or entity as a representative of the group, and then by the doctrines of agency and vicarious liability, the group becomes liable for the acts of its members. It follows that the application of the principle of group responsibility is contingent upon the recognition of a single legal personality for the group. This is possible where the productive relations are controlled and directed within one capital unit, a firm in the legal form of a partnership or company. Where the group is composed of several capital units, however, it loses the necessary unity for the application of the principle of group responsibility.

In many sectors of the economy, it is normal for work to be carried out by a team composed of several capital units. For example, in construction a common pattern is for a main contractor on the project to subcontract work to numerous specialist independent firms or individuak6 This arrangement separates the capital units involved, though in the process of construction the intensive division of labour requires co-operation and integration analogous to team work within a firm. Nevertheless each contractor retains a separate legal identity, which prevents application of the principle of group responsibility, so that the different contractors on the site will not in general be liable for the torts or breaches of contract of the others.

My thesis here begins with the claim that one of the major sources of confusion and injustice in the common law springs from a failure to develop principles of group responsibility applicable to integrated economic organisations which lack a single identity because they comprise different capital units. I call such groups complex economic organisations, and name the source of difficulties which they present to the principles of responsibility the capital boundary problem. I examine the strengths and weaknesses of several statutory interventions which seek to counter this intrinsic limitation of the principle of group responsibility. I hope that by identifying this common problem to many branches of law and assessing the merits of possible solutions, it will become possible to revise the principle of group responsibility itself, so that it better serves its function of holding a representative of the team as a whole responsible for the acts of all its members.

Complex Economic Organisations

The principle of group responsibility normally allocates legal responsibility satisfactorily

Lawson and Markesinis, Tonious Liability for Unintentional Harm in the Common Law and the Civil Law, Volume 1 (Cambridge 1982) pp 163-167. Lister v Romford Ice Co [1957] AC 555. Tesco Supermarkets Ltd v Nattrass [I9721 AC 153; see Smith and Hogan, Criminal Law (London: 6th ed, 1988) pp 170-176. Report of the Committee of Inquiry under Professor Phelps Brown into certain matters concerning Labour in Building and Civil Engineering, Cmnd 3714 (1968).

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in the context of vertically integrated production. Here the productive relations are controlled and directed within one capital unit, and this unit or firm is held responsible for the acts of its members. Although there has been a steady growth in firm size and vertical integration for most of this century,’ at no time has it completely excluded alternative patterns of economic integration between numbers of firms. When do we discover an integrated form of production relations which lacks the unity of a single legal personality? Given the prevalence of the limited company as the legal institution for aggregating capital for the purpose of productive enterprise, what we seek are groups of companies which are bound together by ties of economic integration. But since these companies represent distinct legal personalities, what forms of bonds tie them together so that they may be more properly described as a group rather than separate individual entities which should be regarded as being absolved from responsibility for the acts of the others? Three forms of such bonding occur between productive organisations: ownership, contract, and authority.

The most common form of ownership without assimilation into a single legal identity arises between groups of companies. Here a head office runs under the mantle of a holding company a number of legally separate companies, which make up a group. Group management steers the conglomerate according to the latest principles of financial accounting, but the law regards each company within the group as a distinct legal entity. In a typical large group there may be more than a hundred subsidiaries, or subsidiaries of subsidiaries, some held as far as five removes from the main board of directors.8 The pattern of distinct corporate entities often arises through the accidents of acquisition, and may not correspond at all to the functional, administrative, and accounting divisions operated by the central holding ~ompany .~ Nevertheless the group is bound together by the ownership of shares in all the subsidiary companies by the parent holding company.

The formation of economically integrated groups through contractual links has already been glimpsed in the arrangements between contractors in the construction industry. A slightly different pattern occurs frequently in manufacturing industry. Here we find a core: firm surrounded by a number of satellites, which supply components and distribute the product. In the motor car industry, for example, it is common for many parts to be purchased from independent suppliers, then assembled by the core firm, and finally the retailing of the product is operated through distributorships and franchises by independent companies.I0 At the same time, services ancillary to the main business of the firm such as cleaning will also be subcontracted.’’ There is some evidence that this pattern of core and periphery has been expanding in recent years, partly to take advantage of possible savings in labour costs.’*

The identification of authority relations which establish an economically integrated group proves harder to pin down. Often authority derives from partial ownership, as in the case where an individual owns a significant proportion of the share capital of a company, which, though insufficient to provide formal legal control by majority voting power, suffices to ensure effective managerial control in practice. In other cases, a creditor such as a bank may acquire sufficient leverage over a productive organisation to be in a position to determine

~~ ~

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8 9 ibid p 12.

10

Purcell and Sisson, ‘Strategies and Practice in the Management of Industrial Relations’ in Bain (ed), Industrial Relations in Britain (Oxford 1983) pp 96-98. Hadden, The Control of Corporate Groups (London 1983) p 9.

Friedman, Industry and Labour (London 1977); Macauley, ‘The Standardized Contracts of United States Automobile Manufacturers,’ Internutiom1 Encyclopedia of Comparative Law, Volume 7, chapter 3, p 18 (1973). eg Morris v Ford Motor Co Lrd [I9731 2 All ER 1084. National Economic Development Office, Changing Working Patterns (London 1986); Wood and Smith, Employers’ Labour Use Strategies (Dept of Employment Research Paper No 63: 1989); Atkinson, ‘Flexibility or Fragmentation? The United Kingdom Labour Market in the Eighties’ (1987) 12 Labour and Society 97.

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its business behaviour in practice. Often a floating charge over the company’s assets, a form of equitable contingent ownership, supplies the source of this authority. In these examples of complex economic organisations, the provider of capital investment retains a separate identity from the productive organisation, whilst at the same time playing a governing role in the organisation.

But the origins of such authority relations are not necessarily tied to forms of ownership and investment, for they may arise wherever the economic dependence of one party upon the other effectively requires compliance with the dominant party’s wishes. They may occur between a core firm and a peripheral subcontractor, which though not linked by a long-term service or requirements contract, become economically dependent and integrated through the practice of repetitive contracting combined with reliance upon the other party as sole supplier or sole customer. Another example of such authority relations occurs where one party to a contract appoints a professional adviser such as an architect or engineer to supervise and measure the work of the other party to the contract. Here the professional adviser enjoys a managerial authority relation over the contractor, without any direct contractual links, and without the adviser becoming part of the employer’s legal personality.

These complex economic organisations bound together by ties of cwnership, contract and authority may in reality comprise some form of team effort, which could easily be integrated within one capital unit, and may therefore be analysed from the point of view of institutional economics as qua~i-firms.’~ Yet since in fact these groups comprise distinct legal identities which in law are regarded as independent persons, members of the group cannot in general be held responsible for the acts or omissions of other members without contradicting the basic principles of legal responsibility. Thus one company can only be liable for its own torts or breach of its own contracts, not those of other companies or independent contractors with which it has close economic ties. This engenders a serious problem for the application of the principle of group responsibility.

The Application of the Principle of Group Responsibility

The existence of such quasi-firm types of economic organisation has placed considerable stress on the ordinary common law principles of legal responsibility in recent years. The recurrent problem has been that formal separations of legal personality, usually in the legal form of discrete companies, place narrow limits on the scope of legal responsibility when viewed in the economic context of close integration of production. The courts have been striving to overcome these artificial barriers by imposing liabilities in ways which make sense in the context of economic integration, despite being prohibited from so doing by the ordinary principles of legal responsibility.

Perhaps the easiest example of this phenomenon to understand arises in connection with liability in tort for the actions of independent contractors. Take an example where two separate legal entities are carrying out an economic venture and the employees of one firm cause damage to a third party. Under the normal principles of group responsibility, the employer of the workers who actually committed the tort will be liable under the rules of vicarious liability, but the other capital unit will escape liability because the employees were not part of this firm and therefore belonged to a separate legal personality. This result may cause considerable hardship where, for example, the employer which is clearly liable lacks insurance or the funds to pay compensation, or is located in a foreign jurisdiction. It will cause injustice where in reality the two firms are economically integrated, despite the formal legal separation, perhaps one being the subsidiary of the other, or both being members of the same multinational group of companies.

13 Eccles, ‘The Quasifirm in the Construction Industry’ (1981) 2 Journal of Economic Behavior and Organization 335.

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The courts have striven to overcome the limitations of the principle of group responsibility in this context by applying the difficult idea of non-delegable duties, which originated as a device to avoid the common employment rule.I4 In the context of complex economic organisations, Firm A will be liable for the actions of the agents of Firm B, despite B comprising an independent legal entity, on the ground that A also owed a duty which it could not avoid by delegating the work to B, another capital unit or independent contractor. For example, in McDemid v Nash Dredging & Reclamation Co LtdIs the defendant employer of a deckhand on a tugboat was held liable for the deckhand’s injuries sustaine:d as a result of the negligence of the captain of the ship, who was employed by a separate corporate entity, the Dutch parent company of the defendant. The formal ground of the decision was that the deckhand’s employer, the defendant, owed a non-delegable duty to its employee to establish a safe system of work, but of course the effect was to hold one company (the subsidiary) liable for the negligence of an employee of another (the parent). The rhetoric of nondelegable duty is designed to obfuscate this effect by describing the form of liability in terms of a personal duty on the subsidiary, and thus squaring the existence of liability with the general principles of responsibility.

In many other instances of complex economic organisations, such as the relation between the main contractor and subcontractors on a building site, English courts have not been willing to circumvent the limits of group responsibility by the device of non-delegable duties. I6 Australian courts have achieved a less muddled and unpredictable approach to the ascription of responsibility in the context of complex economic organisations b:y recognising that this breach of the normal principles of responsibility requires a special duty to arise by virtue of a relationship between the parties, in which the person on whom the duty is imposed has undertaken the care, supervision or control of the person or property of another. A promising justification for this practice would consist in the recognition that vertical disintegration often establishes subcontractors which lack the resources to compensate plaintiffs for negligent damage caused by their workforce. In those circumstances, the aim of compensation in the tort system can be best satisfied by holding the core firm with larger resources responsible. In Atiyah’s perceptive review of the early cases, which established this form of liability by imposing it on highway authorities for negligently performed repairs on public roads, he suggests that this proposed rationalisation influenced the courts’s:

The courts felt that it was not in the public interest that highway authorities employing small- time contractors unable to meet awards of damages against them, should escape scot-free, while other authorities doing the work by direct labour should have to pay the damages themselves. Although this essay focuses on the problem of ascription of responsibility to groups

which lack a single legal identity, it is worth observing that problems with a similar origin have arisen with respect to the range of contractual liability. Here the question becomes, not who is responsible, but to whom is a contractual duty owed? The doctrine of privity of contract normally precludes the contract from vesting rights in third parties. But where: one party to the contract and the third party are in reality both members of a complex economic organisation, the case for discovering routes which circumvent privity in order to give the notional third party rights appears particularly pressing. For example, one reason that the subtle combination of agency and collateral contract proved successful in New Zealand Shipping Co Ltd v Satterthwaite & Co. Ltd (The Eurymedon) may have

14 15 [1987] 1 AC 906. 16

17 18 19 [I9751 AC 154.

Wilsons & Clyde Coal Co v English [I9381 AC 57.

D & F Estates Ltd v Church Commissioners for England [ 19891 AC 177; occupiers liability may apply in some instances: Ferguson v Welsh [1987] 1 WLR 553. Kondis v State Transport Authority (1984) 55 ALR 225. Atiyah, Vicarious Liability in the Law of Tons (London 1967) p 334 (footnotes omitted).

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been due to the fact that the carrier, a party to the main contract and at the same time the purported agent for a collateral contract, was the wholly owned subsidiary of the stevedores, the third party to the main contract and alleged principals to the collateral contract. Of course, if the Privy Council had been prepared to recognise that the carrier and the stevedore in reality comprised two members of a multinational group of companies which could be conceived as a single legal entity for the purposes of establishing contractual responsibility, then the problems presented by the doctrine of privity would not have arisen at all.

Perhaps the greatest difficulty for the common law presented by complex economic organisations now arises in the field of recovery for economic loss in tort. In a typical case involving construction, a property developer is unlikely to have a direct contract with the actual subcontractor doing the work, but will be restricted to contractual claims against a main contractor. If the property developer attempts to sue the subcontractor for poor performance of work in tort instead, the current position in this rapidly changing area of the law seems to be that the courts are unwilling to depart from the requirement of privity of contract in order to establish a cause of action against the subcontractor, this being described as a denial of recovery for pure economic loss in tort.*O Thus in respect of liability in tort, the courts have declined to recognise that the degree of economic integration involved in construction merits the adoption of a more flexible approach to the principle of group responsibility, such that the main contractor and the subcontractor may be regarded as a single legal entity for the purpose of the ascription of responsibility. At the same time, however, the courts have been prepared to overlook the strict separation of legal personalities in order to allow the subcontractor to rely upon contractually agreed limitations of liability in contracts to which the subcontractor was not a party.*'

These examples illustrate typical aspects of the unsatisfactory nature of the principles of personal and group liability in the context of complex patterns of integration of production. Where the work is organised through numerous separate legal entities rather than a single firm, the limits of legal responsibility set by reference to the boundaries of capital units establish the conditions for potential injustice. The common law courts respond to this predicament, not by questioning the principles of legal responsibility, but by manipu- lating existing doctrines which establish personal and group liability, without invading the cardinal principle that the firm is only liable for breach of its own contractual and tortious duties.

The Capital Boundary Problem

The social significance of these principles of legal responsibility should now be considered. Firms enjoy considerable freedom both in law and in practice to determine the limits of their boundaries. A firm can decide to produce commodities or services within its own organisation or make contracts outside the firm with independent legal entities for the same work to be performed. Furthermore, a firm can operate through numerous corporate entities, corresponding perhaps to different aspects of production, establishing a group of companies managing an economically integrated enterprise. No laws limit this freedom to organise production through external contractual relations with other firms or through subsidiaries.

Nor do I think that substantial economic considerations impel firms towards vertical integration within one corporate entity. With respect to external contracting, economic theories of firm size demonstrate that the relevant cost considerations may often be finely

20 21

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D & F Estates Lrd v Church Commissioners for England [1989] AC 177. Norwich Ciry Council v Harvey [ 19891 1 All ER 1180; Pacific Associates Inc v Baxter [1989] 3 WLR 1150.


balanced. 22 In many instances the additional cost of subcontracting work engendered by the contractor’s profit margin can be more than offset by the lower management costs of the core firm and the efficiency of the subcontractor arising from lower overheads, better economies of scale, and hiring workers from a lower paid labour market. Although some production processes such as an assembly plant along a conveyor-belt may impel a firm towards vertical integration within a single corporate entity, these constraints do not seem ultimately significant when we recall that in McDermid v Nush Dredging &. Reclamation Co Ltd even the crew of a ship could have different employers. The economic constraints upon the adoption of complex economic organisations seem to disappear altogether when we consider the proliferation of subsidiary companies.

One important and general effect of this freedom of capital organisation is that the decision with respect to firm size also has a profound bearing on the potential liabilities of the company as a result of the limitation of legal responsibility to the firm’s own actions and omissions. The capital boundary problem which arises consists of this: because the firm determines its own size, it also chooses the limits of its legal responsibilities, which in turn provides an open invitation for the evasion of mandatory legal duties.

The effects of the acceptance of such an invitation are noticeable in all branches of the law concerned with productive activities. In connection with employment protection rights, for example, many legal systems relieve small employers from some or all obligations towards employees, such as maternity rights or compensation for dismissal.23 By keeping the size of firms small and securing production through a series of contractual relations between independent firms, employers can avoid or reduce their legal obligations towards employees. Here we see a combination of the group responsibility principle and a statutory limit being exploited through the freedom to determine firm size in order to deprive workers of elementary rights.

Perhaps the most significant example of the effects of the limits on legal responsibility in combination with capital’s freedom to determine its own size occurs in connection with insolvency of companies. On general principles of legal responsibility, one company cannot be liable for another’s debts. Accordingly, if production is organised through a group of companies, each company within the group can only be liable for its own contractual debts. In the event of the insolvency of one subsidiary company, therefore, the other companies in the group will not in general be liable to creditors, who may go uncompen- sated as a direct result of the manipulation of capital boundaries. Indeed, a majority shareholder or a parent company may provide capital to the subsidiary in the form of secured debt rather than equity, thus achieving priority in English law over unsecured creditors24:

English company law possesses some curious features, which may generate curious results. A parent company may spawn a number of subsidiary companies, all controlled directly or indirectly by the shareholders of the parent company. If one of the subsidiary companies, to change the metaphor, turns out to be the runt of the litter and declines into insolvency to the dismay of its creditors, the parent company and the other subsidiary companies may prosper to the joy of the shareholders without any liability for the debts of the insolvent ~ubsidiary .~~

Here the costs of mismanagement, the risks of undercapitalisation, or liability for hazards such as tort claims by third parties are thrown onto the creditors of the subsidiary firm, rather than being born by the economic organisation which effectively controls the productive operation. Far from being a curious anomaly of English company law, this result springs

22 23 24

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Williamson, ‘The Organization of Work’ (1980) 1 Journal of Economic Behavior and Organizarion 5 . Smith, ‘Employment Laws and the Small Firm’ (1985) 14 IU 18. Suiomon v Salomon & Co Ltd [ 18971 AC 22; see Prentice, ‘Groups of Companies: The English Experience’ in Hopt (ed), Groups of Companies in European Laws (Berlin 1982) p 104. Templeman LJ, Re Sourhard & Co Ltd [I9791 1 WLR 1198, 1208.

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directly from the legal principles of personal and group responsibility, and it illustrates the injustices caused by the capital boundary problem in full swing.

Another example where capital boundaries can have profound social effects concerns the legality of industrial action by workers. In legal systems which prohibit secondary industrial action, that is industrial action designed to interfere with the productive activities of a firm not directly connected with the dispute, the establishment of a group of companies can place severe constraints on the legality of strikes. Where the workers are in dispute with only one firm in the group, any actions designed to impede the operations of other firms in the same group may lead to liability in tort. As Sir John Donaldson MR observed in Dimbleby & Sons Ltd v National Union of Journalists, a case involving a group of companies concerned in the production of newspapers?

It may strike some people as odd that the liability of the union should depend upon what they may reasonably regard as almost being a matter of chance, namely, whether the directors of the T.B.F. group decided to arrange that one subsidiary should employ journalists and another undertake printing as contrasted with deciding that one subsidiary should undertake both printing and journalism. Whether or not the union would be right so to regard the position, that appears without doubt to be the law.

This oddity of chance illustrates the capital boundary problem in stark relief, with the freedom to determine the shape of capital units serving as a useful device for employers to isolate legitimate industrial action whilst enjoying the benefits of full economic integration.

These examples of the capital boundary problem indicate the serious implications of the legal principles of personal and group responsibility. Since owners of capital enjoy the freedom to determine the limits of firm size, either by contracting out work to independent legal entities or structuring the firm in the form of a group of companies, this freedom entails the power to manipulate capital boundaries in order to reduce or eliminate potential legal liabilities or, as in the case of secondary industrial action, to limit another’s immunity from liability. In many instances this produces results which the courts acknowledge to be curious or odd, and others might consider downright unjust. Although these examples draw upon different fields of law, the common element is provided by the context of complex economic organisations which have not been reduced to a single legal entity. In these circumstances the boundaries between different capital units, be they separate companies, partnerships or personal businesses, function to place unjustifiable limits upon legal responsibility.

Statutory Intervention

The capital boundary problem has not been disregarded by Parliament. In a miscellany of minor adjustments to the principles of personal and group responsibility, statutes have modified their effects to deal with particular incidents of injustice. This piecemeal approach succeeds in countering the worst injustices in some of the areas which we have already considered, but the common law lacks a more general principle which might enable the courts to defeat the power of capital to organise itself in ways which reduce or eliminate liabilities arising from productive activities. Let us reconsider those three examples of employment protection rights, insolvency of subsidiaries and secondary industrial action, to examine how the legislature has tackled these instances of the capital boundary problem to see whether any of these techniques offer a framework for a more systematic treatment of the capital boundary problem.

26 [1984] ICR 386, 402; appeal dismissed [1984] ICR 386; see Bercusson, ‘Workers, Corporate Enterprise and the Law’ in Lewis (ed), Labour Law in Britain (Oxford: Blackwell, 1986) pp 152-153.

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Associated Employers In connection with employment protection rights, the legislation often extends those rights to take into account the fact that the employer is part of a group of companies by means of the concept of associated employers. Under the statutory definitionz7:

any two employers are to be treated as associated if one is a company of which the other (directly or indirectly) has control, or if both are companies of which a third person (directly or indirectly) has control . . .

This provision improves an employee’s position in several contexts. Many employment protection rights depend upon a period of continuous service for a particular employer.28 If, however, an employee is transferred from one member of a group of companies to another, he would lose his accrued entitlement but for the presence of this exception for associated employers.29 Similarly, where the rights of employees are limited by the size of the firm, the number of employees of the firm is often judged by reference to its associated companies as well. Unfortunately, the legislation does not always include this extension of responsibility in contexts where it is plainly apposite. For example, an employer is under a duty to consult a recognised trade union when considering a sale of the business or a decision to make redundan~ies.~~ Here the associated employers extension does not apply, so that where in reality the parent company of the group makes the decision and the subsidiary employer merely acts on instructions, no duty arises on the parent company to consult the trade union. This renders the duty to consult placed on the subsidiary rather p~intless.~’ Nevertheless, in some instances the concept of associated employer prevents the evasion or diminution of statutory rights by the establishment of capital boundaries. The question therefore arises whether the concept of associated employer might be used in order to provide the basis for a more general principle of group responsibility to counter all the manifestations of the capital boundary problem.

Unfortunately, the concept of associated employer suffers from a serious limitation in this respect. The crucial term ‘control’ in the statute is not defined. The courts have interpreted the word to refer to ownership of shares. For two companies to count as associated employers, the courts require either a single legal entity to own 5 1 % of the shares in both companies, or a group of persons, which always acts in concert in determining business policies, to have similar voting control by virtue of share ownership in two cornpanie~.~~ It follows that neither common ownership by a single individual of 50% of the shares in two companies,33 nor the practice of managerial control on a day-to-day basis by a minority hareh holder,^^ suffices to establish that the employers are associated.

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Employment Protection (Consolidation) Act 1978, s 153(4); see Bercusson, op cit n 26, pp 149-151. See Szyszczak, ‘Employment Protection and Social Security’ in Lewis (ed), Labour Law in Britain (Oxford: Blackwell, 1.986) p 364. Employment Protection (Consolidation) Act 1978, Sched 13, para 18. Transfer of Undertakings (Protection of Employment) Regulations 1981, SI 1981 No 1794, Reg 10; Employment Protection Act 1975, s 99; see Collins, ‘Transfer of Undertakings and Insolvency’ (1989)

eg NALGO v National Travel (Midland) Ltd [1978] ICR 598. This limitation also affects the required period of consultation in the context of a group of companies: Green (E) & Son (Castings) Ltd v ASTMS [1984] ICR 357. The same limitation applies to the practice of hiving down during a liquidation of a company: Davies and Freedland, Transfer of Employment (London: Sweet and Maxwell, 1982), note to Regulation 4(1). The EEC Draft 5th Directive on Company Law (the Vredling Directive) (as amended 19 August, 1983), recently restated in the Preliminary Drafi of The Community Charter of Fundamental Social Rights (1989) Article 22, would alter this result. Hartford v Swifrim Ltd [1987] ICR 439; Zurb & Samuels v British and Brazilian Produce Co (Sales) Ltd [1978] IRLR 78; see Collins, ‘Associated Employers’ (1989) 18 ILJ 109. Hair Colour Consultants Lid v Menu 119841 ICR 671; South Wesr Launderettes Lid v Laidler [1986] ICR 455. Poparm Ltd v Weekes [1984] IRLR 388; Sourh West Launderettes Ltd v Laidler [1986] ICR 455.

18 IU rw, 153-157.

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We can therefore discover many groups of companies, which though economically integrated in practice, because of the particular pattern of distribution of share ownership, cannot count as associated employers for the purpose of extending the scope of employment protection rights in the face of the capital boundary problem.

This unsatisfactory result flows from the unnecessary obsession with patterns of share ownership. By judging the presence of control this way, the courts fall into the trap of reinforcing the capital boundary problem. They permit the artificial limits of the size of each firm to have an often decisive bearing on the question, rather than seeing their task as one of cutting through formal legal distinctions in the search for the reality of centralised economic control. In order to overcome the capital boundary problem in the context of employment protection rights, the courts need to reconsider the concept of control in order to encompass not only employers bound together by formal identity of ownership but also those cases where in practice management of the firms resides in the same hands and pursues a common goal. The Court of Appeal has recently hinted that such a reconsideration may be on the cards.35 As the concept of associated employers stands, however, its respect for the distribution of shareholdings renders it an unsatisfactory basis for establishing a more general principle of legal responsibility in the context of complex economic organisations.

A second limitation of the concept of associated employers arises from the same obsession with patterns of ownership rather than effective economic integration. Although the concept applies to many parent-subsidiary company relations, it cannot apply to the relation between a core firm and a subcontractor. The implications of this limitation of the concept of associated employer can be illustrated with respect to claims for equal pay. Although section 1(6)(c) of the Equal Pay Act 1970 (as amended) permits comparisons of pay between men and women of associated employers under certain conditions, this does not include comparisons of rates of pay between a core firm and peripheral independent contractors, even if the women are working in the same location as male employees of the core firm.36 This limitation of responsibility provides the core employer with an invitation to exploit the lower rates of pay in the secondary labour market by the simple device of subcontracting out the work, knowing that the subcontractor will employ women at much lower rates of pay than the men in the core firm. All the problems of the employers in Hayward v Cammell Laird Shipbuilders Ltd” would have been solved at a stroke if they had subcontracted the catering work at the shipyard. This example demonstrates that the second failing of the concept of associated employer is that it cannot accommodate the form of complex economic organisation established by the practice of vertical disintegration through subcontracting work, even in circumstances where the relation between a core firm and an independent contractor is virtually indistinguishable in practice from that of an integrated corporate entity.

Shadow Directors With respect to the problem of insolvency of subsidiary companies, we discover a number of partial solutions to the capital boundary problem. First, there are statutory and common law techniques for piercing the corporate veil in cases of insolvency. At common law, in the event of allegations of fraud against a director or controller of a company, the courts sometimes permit a piercing of the corporate veil, at least to the extent of freezing assets of the director or other companies controlled by that director to which he may have siphoned off funds, until the issue of fraud has been resolved.38 In the USA courts also exercise

35 36 37 119881 ICR 464. 38

Payne v Secretary of State for Employment [I9891 IRLR 352. Szyszczak, ‘Pay Inequalities and Equal Value Claims’ (1985) 48 MLR 139, pp 153-154.

Re a Company Ltd [1985] BCLC 333.

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a broad equitable jurisdiction to subordinate any claims of a parent company or other controlling shareholder against an insolvent company until the claims of other creditors are paid off.39 In Britain, two additional statutory provisions permit a piercing of the corporate veil in order to hold the directors or managers of a company personally liable for the debts of the company.4o Under section 213 of the Insolvency Act 1986, any persons who were knowingly parties to the carrying on of the business with the intent to defraud creditors of the company may be held liable for the company’s debts at the court’s discretion. Although this provision may extend to a parent company which actively manages the affairs of the subsidiary, because the provision is strictly limited to fraudulent and dishonest acts, it cannot apply to the general run of cases of mismanagement or undercapitalisation of s~bsidiaries.~’ The more recent provision of section 2 14 holds directors of a company personally responsible for the company’s debts, if that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, unless the director can satisfy the court that he took every step with a view to minimising potential loss to creditors he ought to have taken. This statutory remedy for wrongful trading may enable a creditor to tap the resources of a parent company, where that company was itself a director, but not if, as is much more likely, the parent company simply appoints the directors by virtue of its control over the voting power at general meetings.

A much more promising device for trapping the parent company consists in the concept of shadow directors. The liability under section 214 for wrongful trading also applies to shadow directors, defined as a person in accordance with whose directions or instructions the directors of the company are accustomed to This concept of shadow director should often encompass parent companies, for they seem to exercise precisely this kind of control over the board of directors of subsidiaries. Although this does not go so far as to render parent companies liable in general for the debts of their subsidiaries, they may become liable for wrongful trading when there has been both active engagement in the management of the subsidiary plus gross negligence with respect to the solvency of the subsidiary.

Nevertheless, the concept of a shadow director offers an interesting solution to the capital boundary problem in the context of insolvency. It captures the idea of economic control which binds a group of companies together, without becoming bogged down in the question of the precise distribution of share ownership which renders the concept of associated employer so fruitless. Moreover, by escaping from the linkage with ownership, it opens up the possibility of discovering the presence of shadow directors not only in the parent- subsidiary relation but also between firms which have no such links through share ownership. The controller of a company might comprise not an equity holder but rather some other creditor such as a bank. In one case where a bank became alarmed about the solvency of a company with an unsecured overdraft, the company took various steps to implement recommendations in a report submitted after an investigation by the bank and granted the bank security for its loan. In these circumstances the court found the claim that the bank had become a shadow director of the company was not obviously unsustainable and refused

39 Taylor v Standard Gas and Electric Co (Deep Rock) 306 US 307 (1939); Pepper v Litton 308 US 295 (1939). This ‘Deep Rock’ doctrine is now given statutory recognition in the Bankruptcy Code, s 510(c), USCA Title 1 1 . For the sake of brevity, I do not discuss other potential statutory weapons for creditors in this context, such as the avoidance of transactions at undervalue, fraudulent conveyances, and fraudulent preferences (Insolvency Act 1986, ss 238, 423, 239, respectively); see Prentice, ‘The Effect of Insolvency on Pre- Liquidation Transactions’ in Pettet (ed), Company Law in Change (London 1987). In particular, attempts to pay off debts to the parent company in preference to other creditors, as in cases such as In re SarfIar Ltd [1979] Ch 592 would be caught under s 239(6). Re Augustus Barneft Kt Son Ltd [1986] BCLC 170; noted, Prentice (1987) 103 LQR 1 1 . Insolvency Act 1986, s 251.

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to strike it In this respect, therefore, the concept of shadow director offers a much more powerful tool for tackling the capital boundary problem than the concept of associated employers.

The main weakness of this concept as a technique for overcoming the capital boundary problem in general lies in its insistence upon a pattern of domination. In the context of holding one company liable for the debts of another, this limitation may make sense. For example, creditors of other solvent subsidiaries run relatively independently in foreign jurisdictions might be adversely and unfairly affected by holding a parent company liable for its other subsidiary’s debts. But this objection to group responsibility appears less forceful where the parent company has closely controlled the insolvent subsidiary in the manner of a shadow director.

The Cork Committee declined to make a clear recommendation on the question of the liability of parent companies for the debts of insolvent subsidiaries, giving as its fundamental reason the point that the introduction of such liability would necessitate a reformulation of directors’ duties in the parent company, for clearly they would be required to consider the interests of creditors of subsidiaries when making capital investment decisions.M But this is a weak objection to the extension of group responsibility, given the divorce between actual practice and formal legal duties which already exists, together with the potential for abuse afforded by the separation of corporate entities.

Nevertheless , the requirement of domination through managerial control envisaged in the concept of shadow director may provide an intelligible limit to the liability of parent companies for the debts of subsidiaries. Yet in other contexts the concept of shadow director would prove inadequate as a tool for tackling instances of the capital boundary problem. The concept excludes many other types of complex patterns of economic integration where the companies are not only formally independent but also managerially independent, whilst at the same time functioning together in an integrated economic enterprise. This might prove the case, for instance, in the hypothetical example of the catering in the shipyard being run by an independent contractor. Here a possible equal pay claim would not be assisted despite the social and economic reality of quasi-firm integration. In short, the concept of shadow director addresses the forms of bonds described earlier as authority relations, but cannot grasp the nature of group integration established through contract.

Direct Contractual Relations The liability of unions in tort for secondary industrial action provides the occasion for a third kind of legislative solution to the capital boundary problem. Here the separation of corporate entities serves the purpose of expanding an employer’s immunity from lawful industrial action. The group responsibility principle is used to present employers not in dispute with their own employees as neutral third parties, who should be protected from disruptive industrial action by the imposition of liability in tort on the union. Under section 17 of the Employment Act 1980, however, the legislature recognises that some capital boundaries, which divide one employer from another, may conceal a reality of economic integration and interdependence. In these circumstances, the statute permits lawful industrial action against the formally neutral employer in two distinct ways.

In &e United States the artificiality of some capital boundaries which divide one employer from another has been partially overcome by the ‘ally doctrine,’ which treats two employers as one for the purpose of defining the limits of legitimate industrial action if there exists both common ownership and common management policies.” Under British law, the

43 Re a Company (No 005009 of 1987), ex p Copp [ 19891 BCLC 13. 44 Insolvency Law and Practice, Cmnd 8558 (1982), chapter 51, para 1951. 45 Levin, ‘Wholly Unconcerned: The Scope and Meaning of the Ally Doctrine under Section 8(b)(4) of

the NLRA’ (1970) 119 U Penn Law Rev 283; H. Lesnick, ‘The Gravamen of the Secondary Boycott’ (1962) 62 Columbia Law Review 1363.

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common ownership strand is represented again by the concept of associated employer, so that in certain circumstances industrial action aimed at an associated employer may be But in addition, a further ‘gateway’ to legality for secondary industrial action permits strikes aimed at direct suppliers or customers of the primary employer, provided that a subsisting contract binds the supplier or customer to the primary emp10yer.~’

As a practical matter, this contractual requirement deserves scorn, for union strike organisers can hardly be expected to know the details of commercial agreements made by their members’ employers, so they cannot ascertain in advance whether they satisfy this route to lawful industrial Yet if the law is searching for a way of distin- guishing between genuinely neutral employers and patterns of complex economic organisation which in reality represent a single integration organisation despite the separation of discrete corporate identities, then good evidence of the latter pattern may emerge from the existence of a long term contractual arrangement for the supply of goods or services. Nevertheless, the absence of such a contract should not prove determinative, for the degree of economic interdependence may be sufficiently strong that the safeguards against opportunism afforded by binding contractual relations may prove unnecessary .49 In these circumstances, a repetitive pattern of contracting for essentially the same goods or services should suffice as evidence of the degree of economic integration necessary to warrant a finding of legitimate secondary industrial action.

Moreover, these repetitive patterns of contracts should not be limited to bilateral relations, for we may discover multiple employers operating an integrated network. For example, in the campaign run by the International Transport Workers’ Federation against flags of convenience, the employers included the ship’s owners, the charterers, the port authorities, the tugboat operators, the stevedore company, and so forth, all of which needed to co-operate to berth, unload and send a ship on its way.5o Any action by the union was bound to disrupt this integrated system, whether or not contracts subsisted between some of the employers with the effect of rendering the industrial action lawful.

This third approach to the capital boundary problem contained in the legislation on secondary industrial action therefore fastens upon contractual relations between distinct corporate entities in order to prove that they should be regarded in law as a single economic entity. It suffers from the disadvantage that the contractual requirement may not be satisfied precisely because the parties are so closely integrated in their operations that there is no need for binding contractual relations. On the other hand, it has the advantage of freeing itself from the obsession with common ownership of capital which invests the concept of associated employer and the analogous US ally doctrine. Furthermore, it avoids the implicit hierarchy of the shadow director test, and therefore permits cutting through capital boundaries between equal companies where there is no domination of one by the other.

Conclusion

The law’s attachment to the principle of personal responsibility, though transmuted to

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Employment Act 1980, s 17(4). Employment Act 1980, s 17(3)(6); and provided that the action does not involve picketing at a place other than the primary employer’s workplace: News Group Newspapers Ltd v SOGAT 82 (No 2 ) [ 19871 ICR 181. The term ‘gateway’ comes from Wedderburn, ‘Secondary Industrial Action and Gateways to Legality: A Note’ (1981) 10 ILJ 113. [Section 17 of the Employment Act 1980 has now been replaced by section 4 of the Employment Act 1990 which does not include either of these gateways.] Wedderburn, The Worker and the Law (Harmondsworth: Penguin, 3rd ed, 1986) pp 599-601. Granovetter, ‘Economic Action and Social Structure: The Problem of Embeddedness’ (1985) 91 American Journal ofSociology 48 1 ; Macaulay , “on-Contractual Relations in Business: A Preliminary Study’ (1963) 28 American Sociological Review 55. See Davies, ‘Labour Law and Multinational Groups of Companies’ in Hopt (ed), Groups of Companies in European Laws (Berlin 1982) pp 219-220. For the litigation, see Marina Shipping Ltd v Laughron [I9821 ICR 215; Mercur Island Corp v Laughron [1983] 2 AC 570.

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the responsibility of groups in legal forms of the firm, prevents the ascription of legal responsibility to economic groups which establish internal legal boundaries between the capital units. Because owners of capital enjoy an unrestricted freedom to determine the shape and size of legal personalities which bear the burden of legal responsibility, they can exercise their freedom to avoid obligations or restrict another’s rights by adopting patterns of vertical disintegration for productive activities. In the absence of statutory intervention, the common law permits this evasion of legal responsibility, for it does not usually penetrate the formal separation of legal identities. The principle that I should not be responsible for another’s actions leads directly to the injustice sometimes caused by not holding a parent company liable for a subsidiary’s debts, not holding a main contractor liable for the torts of a subcontractor, and so forth. When in reality these separate legal personalities constitute an integrated productive organisation, the freedom to determine the boundaries of a capital unit turns into a licence to evade legal responsibilities towards others. This is the capital boundary problem.

Yet to overcome this problem, to ascribe responsibility to groups which have declined unification within a single legal personality, requires extremely subtle legal principles. We should continue to respect the general principle that one person should not be held responsible for the actions of another, whilst recognising that the formal separation of legal identities in complex economic organisations may conceal what in reality constitutes a single set of productive relations which should be treated as a united group for the purpose of the ascription of legal responsibility.

These complex patterns of economic integration may be linked together in three principal ways: ownership, authority and contract. The three statutory techniques for overcoming instances of the capital boundary problem which we have considered reflect these three legal mechanisms of ensuring economic integration outside a single firm: the concept of associated employer searches for common ownership; the concept of shadow director looks for authority; the first supplier, first customer gateway to legality for secondary industrial action rests on a contractual link. Each statutory technique shares the weakness that it pays attention only to one form of bonding, whilst ignoring the other two. Furthermore, these three links establishing complex patterns of economic integration do not exhaust the possibilities, for the interdependence of members of the group may be sufficiently intense to dispense with any formal legal mechanisms of bonding altogether.

In the long term, it may not prove possible to reconceptualise the general principles of legal responsibility in a way which substantially departs from the existing principles of personal and group responsibility. Instead, each branch of the law may have to adopt its own way of identifying integrated, though legally separate, economic units for the purpose of attaching obligations. My hope is that an examination of the possible different approaches from different fields of law will encourage the perception that a common problem is being tackled and that eventually a common solution may be found.

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Documents

Ascription of Legal Responsibility to Groups in Complex Patterns of Economic Integration