Part 1 of this discussion appeared in CMJ’s Sept. 11 Daily Headline News.
Canadian parent companies with foreign subsidiaries face some difficult policy issues that arise from the recent Ontario court decision, and others that could arise if the foreign plaintiffs are ultimately successful at trial. For example:
- Agency relationship. If the Canadian parent company is ultimately found to be indirectly liable for the actions of its subsidiary under the theory that the subsidiary was acting as the “authorized agent” of the parent, it will be important to consider the basis for the finding of “agency.” In particular, it will be necessary to consider whether the basis for the finding of “agency” is an erosion of the long-standing, foundational principle of corporate separateness, or whether the factual findings in respect of the actions of the parent and subsidiary fit easily into the traditional grounds for a finding of agency. The result could have implications for what parent companies should do to mitigate liability through their corporate governance structures. For example, a distinction must be made between, on the one hand, actions that demonstrate a principal-agent relationship between a parent company and its subsidiary, as compared to, on the other hand, activities in relation to subsidiaries that are part of an appropriate governance structure and may be necessary for the parent to comply with securities and other legislation, such as the preparation of consolidated financial statements or the setting of general company policy.
- In considering this potential novel duty of care, the courts will ultimately have to take into account not only questions of good human rights practices, but also the obligations that parent companies have under certain extra-territorial statutes such as anti-bribery and corruption laws. Whatever the result, companies will have to consider issues of reputational risk and enterprise value risk that all too frequently attend a company faced with allegations of human rights violations.
- Novel duty of care and the role of international law. Significantly, the Ontario court granted intervener status to Amnesty International, permitting it to give evidence on international law and international norms in the area of human rights. Voluntary codes of conduct cited as evidence that a novel duty of care may exist in circumstances where a parent company’s subsidiary is alleged to have been involved in human rights abuses included the Voluntary Principles on Security and Human Rights, the OECD Guidelines for Multinational Enterprises, the UN’s Protect, Respect and Remedy Framework for Business and Human Rights and the International Standards Organization’s involvement in corporate social responsibility (for example, ISO 26000). Amnesty International submitted that, “The existence of these international norms and standards of conduct demonstrate the recognition by companies in the extractive industries of the risks of security forces, both public and private, violating human rights and otherwise causing injury to members of local communities in high risk areas.”
- It is also noteworthy that the Ontario court cited the parent company’s alleged public statements to the effect that it had implemented the internationally recognized Voluntary Principles on Security and Human Rights as a factor to be taken into account in determining the proximity part of the test for establishing a novel duty of care.
- If this factor continues to be applied, the adoption of international codes of conduct and best practices in managing human rights could impact the legal risks facing a Canadian parent company in its foreign operations. Such a result could undermine the overarching goals of these currently voluntary standards for promoting human rights best practices globally. Further, it begs the question whether any duty of care emerging from international standards could be construed as a duty applying to an industry as a whole, making it irrelevant whether the individual company has voluntarily adopted the standard. In the meantime, Canadian companies need to exercise caution when implementing written policies and making public statements concerning their corporate social responsibility practices, including in the area of human rights.
- Common law versus statutory liability. The Government of Canada has made a clear choice not to implement a prescriptive approach to enforcing international human rights standards (at least as yet). This might be compared to the path chosen by the Government of Canada to legislate against the bribery of foreign public officials under the Corruption of Foreign Public Officials Act (Canada), which concerns a different area of corporate social responsibility and which was originally implemented to ratify the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. From a policy perspective, establishing a novel duty of care at common law premised upon, among other things, a myriad of best practices articulated by international and transnational organizations, could create a level of uncertainty for Canadian parent companies without clear guidelines as to whether, for example, the company has an absolute obligation to prevent harm, or whether taking adequate steps proportionate to the risk to prevent harm mitigates against such liability.
- Due diligence. It is noteworthy that certain of the conduct alleged by the foreign plaintiffs occurred before the Canadian parent company acquired the foreign subsidiary. This highlights the importance for Canadian companies to be mindful of the need for due diligence on human rights issues when acquiring companies, and the need to deal with the risk of litigation through appropriate contractual provisions.
*The authors are members of Norton Rose Fulbright’s global business ethics team in Toronto.