This paper is a detailed study of the concept of vicarious liability and the
provision of vicarious liability of a parent company for the acts of a
subsidiary company. The primary focus of the paper lies in discussing whether a
parent company should be vicariously liable for the acts of its subsidiary
The paper states in affirmative the reasons to hold the parent company
vicariously liable along with certain suggestions. It is stated that the parent
company may be held parallelly liable with the subsidiary on the grounds of its
own negligence and on the basis of vicarious liability.
This conclusion was
achieved after conducting a survey and comparison with various foreign case
laws. The paper also states that a clear demarcation must be maintained between
direct liability of a parent company as a result of breach of duty of care and
vicarious liability as a result of lifting the corporate veil.
The concept of vicarious liability and lifting of the corporate veil has been
heavily debated in the recent years. In view of development of big multi
corporations, the victims of the activities of these corporations must be
defended appropriately. These corporations expand and branch out creating
several new subsidiaries within one Country or in other Countries. Keeping this
in mind, the basis for imposing vicarious liability on parent company must be
clearly defined. As a principle, a parent company is not held liable for acts of
There are several companies like Morgan Stanley, Google and Microsoft who
maintain several subsidiaries. Companies form subsidiaries either for tax
reduction purposes or for developing business, expansion and growth etc. In
accordance with the provisions of Company Law, a limited liability company is
liable for its own acts and conducts inside the scope of the assets owned by it.
There is no specific approach which is adopted by the Courts regarding the
concept of vicarious liability and piercing of the corporate veil and thereby
holding the parent company vicariously liable. The cases are decided
individually on the basis of the facts. The Court generally take a very
calculated step while lifting the corporate veil.
In the recent times, there has been immense research pertaining to lifting of
the corporate veil in accordance with company law. Vicarious liability of the
company for the acts of its employees has also been researched in detail.
However, there is not much light that is shed on the area of vicarious liability
of parent company for its subsidiary. Therefore, the aim of this paper is to
close the gap in legal research nature of vicarious liability of parent company
for the acts of its subsidiary. The paper also demarcates the direct liability
of parent company and lifting of the corporate veil.
- Tetiana Kravtsova, through her paper has discussed the various
scenarios of applicability of vicarious liability. Vicarious liability is a
complex structure and hence, it is a compilation of both fault liability and
strict liability. She has further discussed that vicarious liability involves
The law is silent on the topic of imposing vicarious liability on the parent
company. As a principle a parent company cannot be held liable for the acts of
subsidiary. She has stated that the English Courts have always been extremely
reluctant to hold the parent company liable.
Despite the existence of exceptions
like the sham concept which means that the Court will look into the legal
personality of a company, if it can be proved that the company had no role to
play in the act committed. The author has also discussed the concept of alter
ego which states that the successor corporation in a merger is the alter ego of
the former corporations. (2016)
- Richard H Burgess, through his paper has stated that the law
does not specify about the parent companies' liability and hence, discusses
the concept of lifting of the corporate veil pertaining to an individual
company and its acts. He further states that since the law is silent upon a
parent companies' liability, the ownership of stock in one corporation by
another must not destroy the fabric of separate legal entity.
Separate Legal entity is a concept that states that the corporation and its
owners are different entities and must be treated as distinct entities in the
eyes of law. The parent companies' liability is regulated in accordance with
limited liability and separate legal entity. The autonomous legal personality of
the corporation will be at risk if a concept like vicarious liability is added
upon the parent company.
In the later part of the paper, the author states the exceptions with regard to
the liability of a parent company. This in turn helped in the creation of the
concept of group liability. The lifting of the corporate veil is an important
concept in relation to group liability and is applied only on a case to case
basis. Therefore, the English Law has dealt with the concept of group liability,
there is are no specific grounds for imposing this liability and it is only used
on a case to case basis based on the Court's discretion. (2015)
- Sam Elson, in his paper describes that if parent companies are
held vicariously liable, then the fundamental principle of separate legal
entity is demolished. The liability of corporations is maintained according
to the concept of limited liability and separate legal entity. The author
has later explained the concept of agency relationship. He raised the
question whether a subsidiary company is an agent of the parent company. He
stated that the subsidiary company cannot be considered to be an agent
because the parent � subsidiary agency requires a close business relation
between the companies' in relation to the fraud that is caused.
The subsidiary company must be performing the acts of the parent company under
its control in order to be held as an agent. He concludes by stating that the
concept of vicarious liability of parent company will arise only when the
subsidiary company is an agent or instrumentality of the parent company. (2010)
In the above review of literature, it can be noticed that the none of the past
researchers or authors have delved into the theory of according vicarious
liability on the parent company. Much has been written about liability of parent
corporations for acts of their subsidiaries, but the material principally
concludes that there is no clear law on the subject. Through the course of this
paper, the author seeks to analyze and explain the reasons for holding a parent
company vicariously liable for the acts of the subsidiary company even in
situations when the subsidiary company is not an agent or instrumentality of the
parent company in order to avoid corporate instability and irresponsibility.
In the initial times, a corporation was not held liable for a crime. However, in
the recent times this view has been rejected. Arguments support that a
corporation must be mandatorily held liable for the acts of a human agent who
performs the act in the course of employment. In order to prove this contention,
it has to be ascertained whether the existing legal concepts allow imposition of
such liability. The next step is to determine under which circumstances can such
liability be imposed.
A company only acts through its agents. The shareholders are the people who are
punished when a corporation commits a wrong. Therefore, vicarious corporate
criminal liability is necessary to impose liability on the shareholders for the
acts of their agents. In situations where the criminal intent is not taken into
consideration, the corporate criminal liability has been imposed since a long
time. It is pertinent to note here, that the difference in the physical act and
the mental intention of the agents cannot act as a barrier to impose the
vicarious corporate liability.
It has been asserted that companies by their real nature are incapable of
carrying out such violations as theft, assault, battery etc. In any case, courts
have now advanced to the situation of perceiving that corporations can be held
guilty of wrongdoings including criminal goal.
- The concept of limited liability and separate legal entity are in place
since time immemorial. Keeping these concepts in mind, can the parent
company be held vicariously liable for acts of the subsidiary company?
- Whether it is necessary to differentiate between direct liability of
parent company and lifting of the corporate veil?
To state that the parent company should be held liable for the offences
committed by the subsidiary keeping in view the concepts of limited liability
and separate legal entity, owing to the massive control enjoyed by the parent
The second objective is to establish the importance of segregating or
differentiating between the direct liability of the parent company caused due to
breach of duty of care and the vicarious liability resulting from the lifting of
the corporate veil. This is of paramount importance owing to the relation
established between the two companies.
The principle research and conclusions have been drawn after conducting a
survey. Through the survey fifteen respondents were questioned. The respondents
belong to the legal field working as corporate lawyers, advisors and
academicians in different entities, like Soci�t� G�n�rale, Wipro, Jyothi Sagar
Associates. Their understanding of vicarious liability was gauged.
later asked if they support the imposition of vicarious liability on a parent
company for acts of the subsidiary. The questionnaire proceeded with
understanding their take on whether the direct liability of a corporate should
be distinguished from the vicarious liability resulting through lifting of the
Various reports, journals and research papers have been referred for collecting
and analyzing the ideas revolving the concept of corporate vicarious liability.
Basis For According Liability On The Parent Company:The parent company can be held liable on the basis of two grounds: breach of
duty of care and the piercing of the corporate veil. A parent company that
exercises control over the working of a subsidiary company, owes a duty of care
on behalf of the subsidiary.
In this scenario, the parent company is said to be directly liable for its own
wrongful conduct. A direct liability is owed when a breach of duty of care is
caused. On the other hand, a vicarious liability is caused due to the breach of
duty of care by another person. A parent company can be held liable in cases of
abuse of the power of separate legal entity. The Courts can lift the corporate
veil and ascertain the individuals behind the fraud. The Court can later impute
the subsidiary company's conduct to the parent company and in turn hold it
However, in many situations there is a failure to rightly distinguish between
the situations in which the parent company is liable on the basis of its own
fault, i.e., direct liability and situations in which the parent company is
liable as a result of lifting of the corporate veil thereby holding the parent
company vicariously liable for the acts of the subsidiary.
Vicarious Liability Of A Parent Company: In pertinence with the present research topic, vicarious liability refers to a
parent companies' liability for its subsidiary. The concept of vicarious
liability was first ascertained under the tort law and this law was common to
most of the ancient cultures. This law holds that an owner may be liable for the
wrongful act even if his fault is not involved or he did not intend to cause
The according of vicarious liability is based on the relationship between the
two people. Therefore, it can be stated that the main elements of vicarious
liability are (a) A wrongful act or omission by another (b) a relationship
between the actual offender and the defendant on whom liability is imposed (c) A
connection between the wrongful act and the relationship shared.
The first necessary element is a wrongful act or omission by another. In the
present scenario, it means that a wrong is committed by a subsidiary company
independently. The second element is the subsisting relationship between a
parent company and a subsidiary company.
The element of relationship plays an important role in according the liability
upon the parent company. The third requirement states that a connection should
exist between the wrongful act and the relationship between the two people. In
the present scenario, a subsidiary company must commit an offence within the
delegated authority by the parent company. This means that the offence must be
in relation to an authority or power that is delegated by the parent
Analysis Of The Survey Results:
The questionnaire was sent across to fifteen respondents. 100% of the
respondents were aware of the concept of vicarious liability and separate legal
entity owing to their education and experience in the legal field. 86.6% of the
respondents stated that the parent company should be held vicariously liable for
the acts of the subsidiary.
||YES (Number of respondents)
||NO (Number of respondents)
80% of the respondents stated that the concept of separate legal entity is not
violated if the parent company is held vicariously liable. However, 1 respondent
who voted for the parent company to be held liable has voted that the practice
will violate the principle of separate legal entity.
Additionally, 53.3% of the respondents are of the belief that the concept of
direct liability and vicarious liability through lifting of the corporate veil
must be separated.
This proves that a large majority the individuals working in Corporates are of
the belief that the parent company must be held vicariously liable. This
research paper will further elucidate on the rationales behind according
vicarious liability on the parent company along with some real time corporate
Legal Rationales Behind According Vicarious Liability:One of the most important legal issue in relation to imposing liability on
corporations is whether a parent company can be held liable for the acts of the
subsidiary. In this section of the research paper the author will be discussing
the rationales behind stating that a parent company must be held vicariously
As a bedrock principle, a parent company is not held liable for the acts of the
subsidiary. However, if it is stated that a parent company cannot be held liable
owing to the concept of separate legal entity, then this will be a tool to
promote corporate irresponsibility.
The control that a parent company enjoys over a subsidiary company is extremely
high. This is because of the ownership factor. The proportion of ownership that
a parent company has over a subsidiary company is extremely high and thus, it
plays an important role. Companies can maintain control from afar but
strategically leave operations in the hands of local managers and the
In the case of Hazeltine Corp. v. General Electric Co, it has
been argued that ownership and control cannot be a legitimate ground for
imposing vicarious lability. However, it has to be noted that for imposing
vicarious liability, control is an extremely essential element, especially in
terms of parent company's liability for its subsidiary as vicarious liability is
essentially an imposition of liability for the wrongs committed by another
Control helps in reflecting upon the relationship between the two companies.
Relationship between the companies is the second rationale behind according the
vicarious liability. In order to hold the parent company liable for its
subsidiary, elements of abuse of control on the part of parent company is a
In Taylor v. Standard Gas & Electric Co. it was held that vicarious
liability is imposed on the employer for acts of the employee because it is a
general assumption that the employer is more solvent than the employee. This
assumption must also apply to a parent company. It is often argued that this
assumption cannot be applied as a subsidiary company is a separate legal entity
encompassing its own capital funds.
If a company is a member of a group of
companies, then the primary company is regarded as the parent company which
accumulates all the resources in the form of dividends and the other companies
are compelled to provide support even if their financial conditions do not
support the process.
This has a negative effect on their financial position. In
certain circumstances, the subsidiary company is undercapitalized by the parent
company deliberately to provide a shield to the latter from any tort liability.
The parent company can also use its control over the subsidiary to transfer
property to itself by capital reductions or overpricing or underpricing of
In Garden City Co. v Burden, a corporation owned an irrigation canal and its
subsidiary that had no assets was responsible for operating and maintaining the
canal. When the canal flooded, plaintiffs successfully sued the parent
corporation. The Court held that because the operating company had no assets it
would be inequitable to allow the parent company to escape liability under the
pretext of the separate identity of two corporations.
Owing to these circumstances, a parent company is more solvent than its
subsidiary. At the level of the two companies there is no such reliance between
two financial units, yet even for this situation parent company has some impact
on subsidiary. Considering that subsidiary typically acts as a team with the
parent company, with endorsement of the latter and in light of a legitimate
concern for the entire gathering the subsidiary is reliant on the parent
Besides, the parent as an investor might be enabled to take an interest in
appointment of the directors of the subsidiary. Despite the fact that
disciplinary system is characterized inside by the subsidiary, accepted parent
company as an investor may impact removal of directors of the subsidiary.
The Court in United States v. Bestfoods has called attention to that the
Court can lift the corporate veil to hold the parent company liable for the acts
of its subsidiary, if the corporate structure is mishandled to accomplish unjust
purposes, most outstandingly, misrepresentation for the shareholder's benefit
and the parent company is legitimately a member in an inappropriate act
Enterprise liability theory is mainstream among clarifications of vicarious
liability of the employer. It depends on the idea of correspondence among
benefit and burden. This theory can likewise be considered in the event of
vicarious liability of the parent company. As indicated by the economic analysis
theory the principle objective of company is to collect welfare for
The parent company as a shareholder has a privilege to get profits from its
subsidiary which can be considered as an advantage. Thus, trouble forced on the
parent company through vicarious liability for its subsidiary might be advocated
by advantage received by the parent company as profits.
Another defense of vicarious liability is "mixed policy" clarification which
incorporates all the previously mentioned justifications. One should focus
on the connection among parent and subsidiary company as opposed to on the
connection between parent company and the victim and the objectives that would
be accomplished by if liability were forced. It is obvious that vicarious
liability is more complex convoluted as it might appear at the primary look. It
incorporates 2-level relationship: tortfeasor-victim and parent company and
Holding the parent company liable is a successful measure to guarantee full
remuneration to the survivors of the criminal wrong and to make such enterprises
Need For Distinguishing Between Direct Liability And Vicarious Liability:
It is pertinent to note that in situations when the parent company can be held
liable for acts of the subsidiary, it is not always necessary to lift the
corporate veil. Suitable corporate structuring stays a powerful risk mitigation
strategy. Rather, we examine under a circumstance where a parent company might
be subject for its subsidiary's activities while applying the normal test of
negligence, including as to foreseeability, proximity and policy.
Going to the two ways to deal with the parent company's liability, for example
parent company's liability for its own negligence and parent company's vicarious
liability. In this manner, the parent company may be held strictly liable
for the wrongful conduct of the subsidiary by reason of the fact that there is
an association between the real wrongdoer i.e. the subsidiary and the parent
the ICJ's stance as indicated by which parent company's liability ought to be
differentiated from parent company's vicarious liability isn't upheld by
everybody and not every person draws clear line between them. It is bizarre
for the courts to recognize personal liability of parent companies based on
legal rules and an obligation which is attributable to corporate veil piercing
doctrine. With that in mind, many contend that in numerous occurrences it is not
feasible to differentiate between the two kinds of liabilities.
From the author's viewpoint, it is critical to distinguish these two sorts of
parent company's liability according to hypothetical perspective, yet in
addition practically speaking. If there should be an occurrence of the parent
company's own liability, limited liability is not at stake, it might incur
liability based on existing lawful grounds that apply to it similarly as these
would apply to non-incorporated elements or to characteristic people.
Besides, so as to hold the parent company liable for its own wrongful conduct an
obligation of care and breach of such duty of care ought to be built up while in
the event of parent company's vicarious liability for its subsidiary the
connection between the parent company and its subsidiary ought to be set
up. Subsequently, we face with totally different grounds for liability of
the parent company. The offended party bringing the action against the parent
organization needs to choose which ground the respondent ought to be held liable
for and thus, to prove either existence and breach of a duty of care on the part
of the parent company or existence and abuse of control which parent company has
over its subsidiary.
A parent company can be held parallelly liable with its subsidiary on the
grounds on its own negligent acts and on the grounds of vicarious liability.
Vicarious liability of the parent company for its subsidiary is more complex
than fault or strict liability. There is a relationship between the actual
tortfeasor and the victim.
This relationship itself is simple and involves
fault liability of the subsidiary. The other element of vicarious liability is
relationship between the actual tortfeasor, and the defendant. This relationship
does not involve fault liability on the part of the parent company, and is in
fact strict liability from the viewpoint of the latter. Vicarious liability of
the parent company for its subsidiary, in particular is more complex than just
fault or strict liability.
It is the author's viewpoint that it is imperative to distinguish these two
separate instances of liability. So as to hold the parent company liable based
on its own careless lead it is important to prove that the parent company has
the obligation of care towards the casualties of the misdeed despite the fact
that it isn't straightforwardly associated with the wrongful act. The UK courts
use 3-level Caparo test in order to ascertain if the duty of care exists.
Contrary to that, although the parent company does not owe a duty of care to the
victims, the parent company may be held vicariously liable for the wrongful
conduct of its subsidiary. In this case the decisive fact is the relationship
between the parent company and subsidiary.
As regards the liability of the parent company for the criminal acts of its
subsidiary, the author is of the opinion that holding the parent company liable
is an efficient step to ensure full compensation to the victims and make such
companies responsible. If it is said that the parent corporation cannot be held
liable for criminal acts of the subsidiary, this can further encourage corporate
irresponsibility. Companies can maintain strategic control from afar but
strategically leave operations and safety mandates in the hands of local
managers and the host government. This way, control can be maintained, while
liability is evaded.
- The Court must first look into the amount of control, investment,
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the parent company is found to have a certain level of control, supervision
over the subsidiary, then the Court must hold the parent company liable.
- The Court must also ascertain if the business of the parent and
subsidiary are relevant and if the parent company had prior knowledge about
the wrongful acts being conducted and if it chose to overlook the wrongful
acts, then the Court must hold the parent company liable.
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