Can a Canadian parent company with a subsidiary operating in a foreign jurisdiction be liable for human rights violations in the foreign jurisdiction that occur at the level of the subsidiary? In a recent decision, an Ontario court has allowed this issue to proceed to trial in three related actions, rejecting arguments by the defendants that the claims brought by the plaintiffs, all of whom are residents of the foreign jurisdiction, disclose no reasonable cause of action.
While the recent Ontario court decision involved a Canadian mining company, the outcome has implications for other industries. Whatever the outcome at trial where issues of liability will ultimately be determined, one thing is clear: international public expectations are changing, and directors and officers of Canadian companies need to be aware of the potential risk of claims by foreign plaintiffs seeking redress for alleged harm committed beyond Canada’s borders.
This bulletin provides an update of the key issues that arise from the Ontario court decision, and highlights key takeaways for Canadian parent companies with foreign subsidiaries.
Lifting the corporate veil – liability under agency principles
It is a long standing principle of Canadian corporate law that companies are distinct legal entities and parent companies are not liable for the acts or omissions of their subsidiaries. There are certain limited exceptions to this rule, including instances where a subsidiary is acting as an “authorized agent” of its parent. In such instances, a court may “lift the corporate veil” and hold the parent liable for the acts or omissions of the subsidiary.
In the recent Ontario decision, the court found that, in one of the actions, the plaintiffs had sufficiently pleaded that an agency relationship existed between the parent and its foreign subsidiary at the material times. As a result, the court concluded that the question of whether an agency relationship existed between the parent and its subsidiary is not “patently ridiculous or incapable of proof,” and allowed this issue to proceed to trial.
Direct liability in negligence – a novel duty of care
There is currently no established duty of care owed by a parent company to ensure that the operations of its foreign subsidiaries are conducted so as to protect the residents of the communities with whom the subsidiary interacts. The plaintiffs argued that, under long-standing principles of tort law, if a duty of care can be established, a parent and its subsidiary can be found jointly and severally liable for negligence if the direct actions of each result in damage.4
The Ontario court found that the plaintiffs had pleaded all the material elements required to support the establishment of a novel duty of care. Accordingly, the court allowed the issue of whether a novel duty of care should be recognized in the circumstances of the actions to proceed to trial.
It is important to note that the foreign plaintiffs in the three actions do not claim that the parent company is indirectly responsible for the conduct of the security personnel that is alleged to have caused the harm, rather that the parent company is directly responsible for having failed to prevent the harm. It is also important to note that once a duty of care is established for a category of cases, it becomes an established duty of care for future cases. This raises the importance of the three actions that have been allowed to proceed to trial.
Under Canadian tort law, there is a three-fold test for establishing a novel duty of care:
1. Foreseeability of harm. First, the harm complained of must be a reasonably foreseeable consequence of the alleged breach. The relevant question is whether the defendant knew or ought to have known about the potential for “general harm” (not “its manner of incidence”).
In one of the three actions, the facts alleged by the foreign plaintiffs against the two Canadian defendants included allegations that they knew or ought to have known that violence is frequently used by security personnel to force evictions of local communities in the foreign jurisdiction, and knew about past violence by security personnel to force evictions of local communities in the foreign jurisdiction, the heightened risk that more extreme forms of violence would be used during the eviction in remote communities, the deficiencies of the local justice system, and the high incidence of violent crime in the foreign jurisdiction.
In the other two actions, the foreign plaintiffs alleged that the Canadian defendants had authorized the use of force in response to peaceful opposition and controlled and directed security personnel, and that the harms were a reasonably foreseeable consequence because the Canadian defendants’ managers and executives were advised of rising tensions, knew that violence had been used at previous forced evictions, knew that the chief of security had been credibly accused of serious and criminal acts (including issuing death threats), knew that security personnel were inadequately trained and in possession of illegal firearms, and knew of deficiencies of the local justice system.
The Ontario court found that if these and other alleged facts were proven at trial, they could establish that the harm complained of was a reasonably foreseeable consequence of the conduct of the Canadian defendants.
2. Proximity. Secondly, there must be sufficient proximity between the foreign plaintiffs and the defendant such that, in conducting its affairs, the defendant had an obligation to be mindful of the plaintiffs’ interests.
The factors that could satisfy the test for proximity include (a) a close causal connection, (b) the parties’ expectations, and (c) any assumed or imposed obligations. Alleged facts in support of a proximate relationship put forward by the foreign plaintiffs included statements by the parent’s senior management concerning discussions with local residents to seek solutions and develop trusting relationships, various promises made by the parent to respect human rights “in the best possible manner,” and public statements by the company that it had adopted certain internationally recognized standards (of which more later).
The Ontario court found that the pleadings disclosed “a sufficient basis to suggest that a relationship of proximity between the plaintiffs and defendants exists, such that it would not be unjust or unfair to impose a duty of care on the [parent company].” It is important to note, however, that the court did not find that a duty of care has been found to exist, and simply concluded that, “It is not plain and obvious that no duty of care can be recognized. A prima facie duty of care may be found to exist ... [at trial].” [emphasis added]
3. Policy considerations. Once the first two parts of the test are satisfied, a novel duty of care is established on a prima facie basis. As part of its analysis, the court must then determine whether there are any policy reasons that negate or otherwise restrict the recognition of a prima facie duty of care.
In the current proceedings, both the plaintiffs and the defendants put forward policy reasons to support their position why the court should recognize a new duty of care in the circumstances.
The defendants argued, among other things, that a private member’s bill introduced to require Canadian extractive companies to meet environmental and human rights standards was defeated (Bill C-300). The defendants also argued that “recognizing a duty would pre-empt the efforts of the federal government over the past seven years to work with Canada’s mining sector to implement corporate social responsibility principles” and that “recognizing a duty risks exposi ng any Canadian company with a foreign subsidiary to a myriad of claims, many of which will likely be meritless.”
In response, the foreign plaintiffs took the position that policy considerations favour the finding of a duty of care for a number of reasons, including the fact that the government of Canada has endorsed international standards of conduct in relation to human rights for Canadian businesses operating abroad, and that establishing a duty of care in this area would support initiatives by the government of Canada.P
The Ontario court found that there were clearly competing policy considerations in recognizing a duty of care in the circumstances, that it is not plain and obvious that a prima facie duty of care would be negated for policy reasons.
Having concluded that the pleadings could satisfy the test for reasonable foreseeability and proximity, and that it was not plain and obvious that policy considerations would negate the finding of a duty of care in the circumstances, the court rejected the argument that the claim should be struck out as disclosing no reasonable cause of action for a novel claim of negligence against the defendants.
Part 2 will appear tomorrow
*The authors are members of Norton Rose Fulbright's global business ethics team in Toronto.