Risky Business: Ontario Court Imposes Vicarious Liability in Choc v. Hudbay Minerals Inc. for the Torts of a Foreign Subsidiary

           Mining in its various forms is one of the industries in which Canada is a world leader.  Canadian owned companies have a presence in many developing countries.   These operations often carry high risks of both environmental harm and human rights abuses, and therefore tort law related to their actions should be of considerable interest to Canadian lawyers.  Until recently, Canadian companies faced with claims have managed to confine the litigation to the courts of the host countries, where the legal standards are generally lower.

           The recent Ontario decision in Choc v. Hudbay Minerals Inc. (2013 ONSC 1414) is viewed as being an important precedent in placing responsibility with the parent company.    It is alleged that subsidiaries of Hudbay, operating a nickel development in Guatemala, employed security personnel who were responsible for raping, murdering, and maiming members of the indigenous population.   On a preliminary motion, Hudbay argued that there was no cause of action, on the grounds that even if the facts are proven, it was not legally responsible for the actions of its separately incorporated Guatemalan subsidiary, GCN.   Justice Carole Brown ruled otherwise, opting to pierce the corporate veil and find the parent potentially responsible.   It is said to be the first time that such responsibility for a foreign subsidiary has been recognized by a Canadian court.  

Piercing the Corporate Veil

           One of the cardinal principles of corporate law is limited liability for the shareholders, established in the landmark House of Lords decision in Salomon v. Salomon & Co. Ltd. ([1897] AC 22).  As noted by Justice Brown, “a corporation is a legal entity distinct from its shareholders” (para. 44).   Outside of special circumstances, courts are reluctant to find Company A responsible the actions of Company B just because it owns all of its shares.   The principle of limited liability means that mere ownership is not sufficient to create liability.   There must be something more.

           The courts have developed a number of  exceptions to this rule of distinct legal identity.  One of the accepted grounds is the rule that a principal is responsible for the acts of its agent.  This rule is typically applied to human individuals, and an employee is legally an agent of his employer, who is responsible for his torts committed in the course of employment.   It can be similarly applicable to corporations, who are artificial persons, and one corporation can be the agent of another.  This was the primary ground on which the judge found Hudbay potentially responsible for the actions of its subsidiary GCN.

           It should be emphasized that this is only a finding on the preliminary motion that the plaintiffs’ allegation gives rise to a cause of action if the alleged facts can be proven.   At trial, the plaintiffs would still have to prove evidentially that GCN did in fact act as if it was an agent of Hudbay.

           The human rights group Amnesty International was an intervener in the case.  The judge appears to have been significantly influenced by their factum, to which she devoted several paragraphs.   Amnesty canvassed the case law, and noted that there have been earlier cases in which Canadian courts have held a parent company responsible for the torts of its subsidiary where there was a foreseeable risk.   The Canadian cases cited involved domestic subsidiaries; however, Amnesty’s factum also pointed to UK cases that found the parent company liable for its foreign subsidiaries.   In  Lubbe v. Cape Plc. ([2000] UKHL 41),  South African plaintiffs who had been injured in an asbestos mine sued the British parent company of the corporation they had worked for.  The House of Lords allowed their claim, partly on the grounds that the foreign subsidiary no longer had any assets.   This applies equally in the case of Hudbay and its subsidiary GCN, whose assets have been sold.   In Lubbe, the court also emphasized the significance of the degree of control that the parent company exercised over its subsidiary.

Relation to Vicarious Liability

           This was just a motion, but as Murray Klippenstein, the plaintiffs’ lawyer pointed out, Donoghue v Stevenson was also just a motion.  Given the importance of the issues involved, at some point a case of this type might find its way to the Supreme Court of Canada (“SCC”).   It will be interesting to see what type of standards the Supreme Court would apply for establishing an agency relationship. 

Critics often complain that the rules for deciding when the corporate veil will be pierced are rather vague. By contrast, a fairly clear jurisprudence has developed with respect to vicarious liability. One might suggest that the principles developed for vicarious liability could, by analogy, provide a basis for deciding when to pierce the corporate veil in tort claims involving subsidiaries. Indeed, Justice Brown made the same connection in Choc, stating:

“Both the defendants and the plaintiffs also made passing references to vicarious liability, but this line of argument is, in essence, the same as the attempt to pierce the corporate veil.” (para. 43)

The SCC’s previous jurisprudence on vicarious liability has taken quite an expansive view.   The case of 671122 Ontario Ltd. v. Sagaz Industries Canada Inc. (2001 SCC 59) is noteworthy.  In that case, the SCC accepted the possibility of holding one corporation vicariously liable for the actions of another corporation (but on the facts, liability was not found).  As this example shows, vicarious liability is a broader construct that can arise between corporations in the absence of veil piercing.  In Sagaz, the second corporation was not even a subsidiary.

           There is a well established principle of “respondeat superior” with respect to the employer-employee relationship.   The employer is vicariously liable for the damage caused by the employee.   There has sometimes been discomfort about the basis of this long-established principle.   Is it based only on the fact that the employer has deep pockets, and can afford to pay large settlements, where the employee usually cannot?   That might appear to be a somewhat unprincipled justification.   The SCC searched for an answer to this question in Bazley v. Curry ([1999] 2 SCR 534).  Justice McLachlin (as she then was), writing for a unanimous court, opined that it was fair because the employer is the ultimate cause of the risk:

“Vicarious liability is arguably fair in this sense.  The employer puts in the community an enterprise which carries with it certain risks.  When those risks materialize and cause injury to a member of the public despite the employer’s reasonable efforts, it is fair that the person or organization that creates the enterprise and hence the risk should bear the loss.  This accords with the notion that it is right and just that the person who creates a risk bear the loss when the risk ripens into harm”   (para. 31).           

Vicarious liability is also absolute liability.   The employer cannot attempt to make a defence by showing that it met the standard of care or made “reasonable efforts” in selecting or training the employee.  

           Historically, vicarious liability existed if the activity that caused the damage occurred within the course of employment.   The definition of that was broadened in Bazley to being “sufficiently closely connected to conduct authorized by the employer…  even if unrelated to the employer’s desires” (para. 3).   The direct tortfeasor also has to qualify as an employee,  rather than an independent contractor.   In Sagaz, the company that committed the bribery that benefited Sagaz Inc. was found to make its decisions independently, so there was no vicarious liability.  

           This might provide a good model for the agency issue in Choc.  If Hudbay is found to have given its subsidiary a general mandate to seek out profitable opportunities while making independent decisions, one could argue that liability is inappropriate.   Conversely, if the facts reveal that the subsidiary had been directed to develop a particular mine in a particular location, it would be more reasonable to consider it an agent for which Hudbay ought to bear vicarious liability.

The Goal of Deterring Harmful Activity

           The doctrine of vicarious liability of employers serves as a reasonable paradigm for reviewing allegations of corporate responsibility for subsidiaries.   If anything, the case for liability is much stronger than in the individual employer-employee relationship.

           In Bazley, the employer was vicariously liable for a tort where it was clearly impossible that the employer could have desired the conduct.   The employee committed sexual assault on children in the care of his employer, which could have no conceivable benefit to the employer.   In the case of a corporation trying to clear a recalcitrant indigenous population from land that it wants to develop, it does not take too much imagination to see how violent methods might serve its purpose, even though the parent company might deny that it wished for that to happen.  

           It may be that the directors and officers of Hudbay’s head office are ethical individuals, who would never have dreamt of instructing their subsidiary to behave unethically.   The practical problem is that it would usually be impossible for investigators to discover such instructions, or find sufficient evidence to prove them in court.   Therefore, as a matter of policy, absolute liability is imposed in situations where the damage is too serious to be tolerated.  Any company who sets off a risk of human rights abuses, even if they do not desire it, is held liable when it happens.   The deterrent is weakened if the defendant can exonerate itself by arguing that it did its best.  The law declares that murder and rape are unacceptable as by-products of mining, and “when the risk ripens into harm,” no excuse for it is acceptable.

           This is a civil case, and all that is contemplated is a monetary payment rather than criminal penalties.   The plaintiffs’ claim is for a total of $12 million, of which $10 million is for punitive damages.  That is a substantial amount of money, but not large in the context of a $1 billion project.

Economic Concerns

           Critics of the decision will be concerned that it increases the cost of doing business and undermines the principle of limited liability.   However, it should be remembered that the rationale for limited liability is to protect the ultimate shareholders so as to encourage them to provide their capital to large enterprises.   It is a different situation where a corporation itself has subsidiaries.  Particularly where the subsidiary is defunct and lacks assets to pay for the damages it caused, it is much harder to justify adding another layer of limited liability to protect the parent company.  

           If a future case like this goes to the SCC and sets a broad precedent for piercing when human rights abuses occur, would the fallout result in Canadian parent companies choosing to simply not enter foreign markets due to greater potential liability?  That is one of the policy issues that the Court would have to grapple with.  Imposing this liability does increase the cost of doing business, but fortunately most projects are already well run and do not generate massive tort claims. 

           Imposing greater responsibility on parent companies is unlikely to rank as a major cost in the context of these megaprojects.   Mining is always a risky business, and companies sometimes lose huge amounts of money because they miscalculated the value of the minerals to be found.   Tort claims of the type made in this case might encourage companies to spend a bit more money to ensure that their foreign security staff is well trained and well disciplined, and obeys the rule of law.  If that is the result, it will be money well spent.  Those who take a long run view of what maximizes the value of the corporation may also argue that there would be a positive externality for Canadian companies as a whole.  If Canadian courts set a high standard of behaviour for them, it will enhance their reputation, and make them more welcome in the host countries in which they operate.

(The author is grateful to Professor Cynthia Williams for bringing this case to his attention.   Professor Eric Tucker provided helpful comments on the issue of vicarious liability.)

 

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