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? Janne Duncan, Michael Torrance and Janet Howard discuss a recent decision in which a Canadian court has allowed this issue to proceed to trial. 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 article 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.
Key issues arising from current proceedings:
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 in Canada 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.
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.
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’
(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).
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 exposing 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.
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
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.
Questions and key takeaways
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:
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
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
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.
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 global business ethics team at Norton Rose Fulbright can advise on international guidelines and principles
respecting human rights, the conduct of human rights due diligence investigations and the type of training required to
address the various types of risk in multiple foreign jurisdictions and emerging markets.