Q6

Petro Plc is a wholly owned subsidiary of Holdings Plc. The directors of Petro are also
the directors of Holdings. Previously, Petro owned Substrata Ltd, an oil-drilling company.
However, in 2016 Petro sold all its shares in Substrata to Oilgroup Plc (so that Substrata
became a subsidiary of Oilgroup). It was a term of the sale contract between Petro and
Oilgroup that Petro would not engage in oil-drilling for five years.
In March 2018, Petro held a board meeting, at which its directors decided to
recommence oil-drilling. However, to avoid breaching the 2016 contract with Oilgroup, it
was decided that the oil-drilling would be carried on by Easyco Ltd, an existing
subsidiary of Holdings that was formed 10 years ago.
Since Substrata was acquired by Oilgroup, Substrata’s safety record has deteriorated
sharply. There have been a number of leaks or explosions at Substrata’s oil-drilling
facilities. These accidents have resulted from Substrata’s negligence, and they have
injured both employees of, and neighbours of, Substrata. Substrata is on the verge of
insolvency. Oilgroup itself also undertakes extensive oil-drilling activities.
Advise Oilgroup whether:
a)it can take any action against Petro or Easyco for breach of the 2016 contract; and
b) it is likely to face any liability in respect of the accidents caused to the employees and
neighbours of Substrata, and whether it could do anything in the future (apart from
improving Substrata’s safety record) to reduce its chances of being held liable for any
future accidents.

This question will examine the potential liability of the parent company, Holdings plc and
Oilgroup, for the actions or omissions of their subsidiary companies, Petro Easyco and Substrata.
While the rule in Salomon's case establishes the principle of separate legal personality for
companies, which can be seen in cases such as Macaura, Lee, Baring and Giles v Rhind , there
are exceptions to this rule where the courts may "pierce the corporate veil" and hold the parent
company liable for the actions of its subsidiaries. Given the history of Petro's relationship with
Oilgroup and the accidents caused by Substrata, it is crucial to examine whether Holdings plc and
Oilgroup could be held liable for the actions of Petro,Easyco and Substrata, and the potential
liabilities they may face.

Petro has entrusted the oil drilling to Easyco in order to avoid breaching the terms of the contract
with Oilgroup. This is a common tactic used by companies to shield themselves from legal
obligations or to engage in prohibited activities, relying on the principle of separate legal
personality. However, it is important to note that this principle is not absolute, as established in
the case of Adams v Cape, where the court pierced the corporate veil to hold the parent company
liable for the actions of its subsidiary. The courts will only do so, however, if the subsidiary is a
mere facade and the parent company has used it to escape pre-existing legal obligations, as in
Jones v Lipman and Gilford Motor v Horne. It is also worth noting that in the case of Prest v
Petrodel, the court held that is it not necessary that the company was originally formed for the
particular purpose.

However, the contract in question was entered into by Petro and Oilgroup, and not by the parent
company and the breach was committed by Easyco. In the case of VTB V Nutriek, it was
established that contractual obligations cannot be automatically transferred to a third party
(privity of contract). Therefore, the key question is who controls Easyco. As stated in the
scenario, Easyco is a subsidiary of Holding, and both Petro and Holding have the same directors.
The decision to recommence oil drilling through Easyco was made by Petro's board of directors.
Given these facts, it is reasonable to argue that Easyco is the alter ego of Petro, and the
controlling minds of both companies are the same, as stated in Lennards Carrying Co Ltd v
Asiatic. In light of Clegg v Pache, it is likely that the court would hold Petro liable, jointly and
severally with Easyco. As a result, Oilgroup may bring an action against both Petro and Easyco.

The question of whether Oilgroup may be held liable for the actions of its subsidiary, Substrata,
which resulted in harm to its employees and neighbours, requires an examination of the principles
laid down in Chandler v Cape. According to this precedent, a parent company may be held
responsible for the activities of its subsidiary if certain conditions are met. These include
operating in the same industry, knowledge of the subsidiary's health and safety practices,
awareness of any unsafe practices, and reliance by subsidiary and the employees on the parent
company for safety.

In the present case, it appears that these conditions are satisfied. However, it is important to note
that the Okpabi v Royal case established a high threshold for holding a parent company liable for
its subsidiary's actions. It was held that a parent company must commit misfeasance in order to be
held liable, rather than non-misfeasance as in Chandler.

More recently, in AAA v Unilever, it was held that a parent company can be held liable if it takes
control of its subsidiary's management or specific activities that lead to harm. Given that Oilgroup
is involved in oil drilling activities and there is evidence to suggest that it had some degree of
control over Substrata's operations, there is a possibility that it may be held liable for the tort
committed by Substrata.

Furthermore, in the Lungowe v Vedanta case, it was established that a parent company can be
sued in the country where it is domiciled for harm caused by its subsidiary in another country.
This suggests that the neighbors of Substrata may be able to bring a successful action against
Oilgroup.
In conclusion, while the principles in Chandler v Cape provide a strong basis for holding parent
companies liable for their subsidiaries' actions, recent cases such as Okpabi v Royal and AAA v
Unilever have established a high threshold for liability. Nevertheless, based on the facts
presented, there is a possibility that Oilgroup may be held liable for the tort committed by
Substrata.