Canada – Cross-border guide to parent company liability for foreign subsidiaries

How and when can a parent company be liable for conduct of its (foreign) subsidiaries

One of the fundamental principles of corporate law in Canada is that parent corporations have a separate legal personality from their subsidiaries, and as such, cannot generally be held liable for their subsidiaries’ activities.¹ As a result, foreign plaintiffs have attempted to hold Canadian companies accountable for the actions of their foreign subsidiaries in one of two ways: either by “piercing” the corporate veil to hold the Canadian parent company indirectly liable for harm allegedly caused by its foreign subsidiary, or by pleading the Canadian parent owes a duty of care directly to foreign plaintiffs for harm allegedly caused by a foreign subsidiary.

Canadian courts have traditionally only pierced the corporate veil (1) where a subsidiary was both wholly dominated and controlled by the parent, and was used as a shield by the parent for fraudulent or improper conduct; (2) where the subsidiary acted as an agent for the parent company; and (3) where a statute or contract requires it².

Jurisdictional gateway considerations

Where a plaintiff has suffered harm caused by a foreign subsidiary of a Canadian parent, the courts are often called upon to assess whether Canada is the most appropriate jurisdiction to hear the matter by analyzing the claim through the forum non conveniens test.³

The task of the forum non conveniens test is to determine which jurisdiction is clearly the more appropriate forum to hear the claim: either Canada, where the parent company is located, or the jurisdiction where the foreign subsidiary operates and/or harm occurred. This involves weighing all relevant concerns and factors to determine the more appropriate forum, with the defendant holding the burden of establishing that the proposed alternative forum is in a better position to fairly and efficiently dispose of the litigation.⁴ Where it can be demonstrated that there is a “real risk” the proposed alternative forum would not provide justice to the plaintiff, Canadian courts are more likely to find that Canada is the more appropriate forum.⁵ In undertaking this analysis, Canadian courts will look closely at the judicial system of the proposed alternative forum and give significant weight to detailed and cogent evidence of corruption or “weakness and lack of independence” in the alternate judicial system.⁶

Key recent cases and developments

Canadian courts have not yet engaged in a thorough analysis of the merits of these types of claims. Rather, the jurisprudence to date has largely resulted from preliminary motions and applications in which the courts have been called upon to assess whether Canada is the more appropriate forum to hear a claim by foreign plaintiffs and/or whether the claims as pleaded disclose a reasonable cause of action or are bound to fail.

In Choc v. Hudbay Minerals Inc.7, the Ontario Superior Court of Justice was called upon to decide whether it was plain and obvious that claims brought by Guatemalan litigants directly against the ultimate Canadian parent (Hudbay Minerals Inc. or “Hudbay”) of a Guatemalan company (Compania Guatemalteca de Niquel or “CGN”) in respect of human rights abuses allegedly committed by security personnel retained by CGN should be struck as disclosing no reasonable cause of action. The defendants argued that the plaintiffs were implicitly asking the court to ignore the separate corporate personalities of the defendant entities, and to impose absolute supervisory liability on “parent and grandparent” companies regarding the operations of the their foreign subsidiaries abroad.⁸

The Court in Choc declined to pierce the corporate veil on the basis of fraud or improper purpose, as the plaintiffs had not pleaded that the subsidiary was used for a fraudulent or improper purpose.⁹ However, the Court accepted that, if the plaintiffs could prove at trial that an agency relationship existed between Hudbay and CGN, they may be able to lift the corporate veil on the basis of agency.¹⁰

The Court also accepted that it was not plain and obvious that a novel duty of care said by the plaintiffs to be owing to them by Hudbay in respect of CGN’s failure to prevent the harm committed by its security personnel was bound to fail.¹¹ Due to the existing political climate in Guatemala, the Court found that Hudbay knew or ought to have known (in other words, it was foreseeable) that human rights abuses are frequently perpetrated by security personnel in the country.¹² In considering whether the relationship between the plaintiffs and Hudbay was sufficiently proximate to established a prima facie duty of care, the Court reviewed, among others, public statements by Hudbay regarding its relationship with CGN and with the plaintiffs, standards adopted by Hudbay applicable to the use of private security forces at resource extractive projects, training provided by Hudbay to CGN’s security personnel, and responsibility that Hudbay and its executives had assumed directly over on-the-ground operations and land issues¹³. The Court found that it was not plain and obvious that a prima facie duty of care could not be made out.

In Garcia v. Tahoe Resources Inc., the British Columbia Court of Appeal overturned a lower court judgment staying a claim by Guatemalan litigants directly against the Canadian parent company (Tahoe Resources Inc. or “Tahoe”) of a Guatemalan subsidiary (Minera San Rafael or “MSR”) for negligence and battery on the basis that Guatemala was clearly the more appropriate forum.¹⁴ In their claim, the plaintiffs pleaded that Tahoe owed a duty of care directly to the plaintiffs as a result of the extensive control it exercised over MSR, and that it breached its duty by negligently hiring, training, and supervising the subsidiary’s security personnel.

The Court of Appeal found that the judge below had erred in her application of the forum non conveniens analysis. In particular, the Court of Appeal found the judge had failed to consider all of the factors that she was required to consider, including: inadequate discovery rules and other procedural difficulties; the likely expiry of the limitation period to commence a civil suit in Guatemala; and widespread corruption in the Guatemalan judiciary.¹⁵ In overturning the judgment below, the Court of Appeal found that the judge had given insufficient weight to the evidence of weakness and lack of independence in the Guatemalan justice system.¹⁶

Last but not least, in Nevsun Resources Ltd. v. Araya, Eritrean workers filed a claim before the B.C. Supreme Court against the parent company of a foreign subsidiary involved in a mining operation in Eritrea, alleging the parent company was complicit in abuses and seeking damages for various breaches of domestic torts and novel torts relating to the breach of customary international law norms against forced labour and torture, among others. The Supreme Court of Canada ruled that the novel claims for breach of customary international law norms brought by alleged victims disclosed a reasonable cause of action and could proceed as directly against the Canadian parent company for its complicity in the abuses.¹⁷ The Court also held that it was not plain and obvious that corporations today enjoy a “blanket exclusion under customary international law from direct liability” for violations of universal norms of international law or indirect liability for their involvement in “complicity offenses”.¹⁸

Practical implications and key takeaways from the Canadian approach

It is apparent from the case law that Canadian companies operating internationally have a growing source of legal risk due to the emerging trend of Canadian courts allowing claims by foreign plaintiffs to proceed in tort directly against Canadian parent companies for harm caused by a foreign subsidiary abroad.

It is important to note that, to date, Canadian jurisprudence in this area has mainly focused on whether Canadian courts have jurisdiction over foreign plaintiffs in respect of conduct committed abroad and whether Canada is the more appropriate forum to hear the plaintiffs’ claims. Canadian courts have appeared sympathetic to plaintiffs that have no real alternative or appropriate recourse in the jurisdiction in which a foreign subsidiary operates, especially where it is demonstrated that that jurisdiction has a corrupt judicial system. The Supreme Court’s most recent decision in Nevsun also indicates that Canadian courts are open to expanding tort liability in Canada for alleged grievous harms committed abroad that would constitute a breach of customary international law norms.

This is a new and evolving area of liability risk exposure and reputational harm for Canadian companies. Companies with operations abroad should give careful consideration to their liability risk exposure for the conduct of those operations and be aware that the corporate chain may not insulate them from liability should something go wrong on the ground. Proper oversight of foreign operations is critical to managing this evolving source of liability risk. The adoption of voluntary standards, such as in respect of international human rights and labour, should be carefully considered with a view to how such standards can and will be implemented and respected on an on-going basis. The adoption of such standards without a plan to implement them across the company’s operations could serve to increase a company’s risk of being sued in Canada for harms suffered abroad in connection with the company’s foreign operations in violation of those standards.

With thanks to Vancouver articling student Lindsey Wilson for her contribution to this guide.