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Overseas claims for foreign environmental harm: Vedanta and the Canadian context

environmental harm

Last month, in Vedanta Resources PLC & Another v. Lungowe & Others, the UK Supreme Court allowed Zambian citizens to proceed with a claim in the UK against a UK-based mining company for environmental contamination allegedly caused by its Zambian subsidiary. As our colleague Lee McBride has recently written, this landmark decision will be of particular interest to multinational parent companies headquartered in the UK.

Vedanta should be of interest to Canadian multinationals as well, because the case mirrors an emerging trend in Canadian case law that has seen international plaintiffs permitted to proceed with claims against Canadian parent companies for the allegedly wrongful activity of their foreign subsidiaries. While these recent cases dealt with claims of human rights abuses with respect to mining operations, the reasoning adopted by the Courts in these cases would likely equally apply to claims arising out of environmental damage caused in a foreign jurisdiction.

Vedanta’s subsidiary, KCM, owned a copper mine in Zambia. Zambian claimants brought negligence and breach of statutory duty actions in the UK against Vedanta. The claim against Vedanta was based on Vedanta’s alleged control and direction of KCM. Vedanta sought summary dismissal of the claim against it. In refusing to dismiss the claim, the UK Supreme Court found that there was evidence that Vedanta had “sufficiently intervened in the management of the mine owned by KCM”. In other words, the Court allowed a direct negligence claim (not vicarious liability) to proceed against the parent company in its home jurisdiction, for activities conducted by its overseas subsidiary. The Court also found that the Zambian plaintiffs could not get substantive justice in Zambia.

The Canadian cases, which are summarized below, share a number of factors in common with Vedanta. In these cases, the claims:

  • Involve direct claims of negligence against the parent company, alleging that they supervised, directed or acquiesced in the wrong committed;
  • Argue that the home jurisdiction is not the appropriate forum, due to deficiencies in the domestic legal system; and
  • Rely on public statements made by the parent corporation with respect to corporate social responsibility to link the parent company to the alleged foreign wrongs.

The summary of the Canadian cases is followed by some key take-aways for any business that operates internationally through subsidiaries.

Choc v. Hudbay Minerals Inc., 2013 ONSC 1414

Hudbay Minerals’ wholly owned subsidiary, CGN, owned and operated a Nickel mine in Guatemala. A claim was brought against Hudbay in Ontario alleging that CGN security personnel, under the control and supervision of Hudbay, had committed a variety of human rights abuses against indigenous people who laid claim to the land on which the mine was located.

Hudbay brought a motion to strike the claim. Hudbay argued that the Court was being asked to ignore the separate corporate personalities of Hudbay and CGN. Hudbay said the claim would impose absolute supervisory liability on parent companies regarding the operation of their foreign subsidiaries. Hudbay further argued that there was no recognized duty of care owed by a parent company to ensure that its subsidiaries’ activities are conducted in a manner to protect those people with whom the subsidiary interacts. The argument rested on the notion that the court was being asked to pierce the corporate veil between parent and subsidiary in order to make Hudbay directly liable for the alleged wrongs of its subsidiary.

The Court refused to strike the claim. It found that any attempt to pierce the corporate veil could survive the motion to strike, because it was claimed that CGN was the agent of Hudbay. This is one of the three limited circumstances which, if proven, may allow a court to look past separate corporate personality as between parents and subsidiaries.

The claim also survived the motion to strike because it was claimed that Hudbay itself was directly negligent. In other words, it was not claiming that Hudbay was vicariously responsible for the torts of the security personnel but, rather “that Hudbay was itself negligent in failing to prevent the harms they committed”. This finding was based on a variety of public statements made by Hudbay and its predecessor organization with respect to the issues in the case and with respect to corporate social responsibility.

Last, the Court took into account that Hudbay’s own executives and employees were directly in charge of on-the-ground operations at the mine, that Hudbay assumed direct responsibility for land claim disputes, and that it had assumed direct responsibility and control over the mine’s security personnel.

Garcia v. Tahoe Resources Inc., 2017 BCCA 39

Tahoe Resources Inc. had a wholly-owned subsidiary that operated the Escobal mine in Guatemala. The claim alleged that private security personnel employed by the subsidiary shot and injured a number of protesters at the mine. It was claimed that Tahoe owed a duty of care to the protesters because it controlled all significant aspects of the operation of its subsidiary, including establishment and implementation of security, setting community relations policies and practices, and implementing strategies to address opposition at the mine. In making those allegations, the plaintiffs relied on Tahoe’s public corporate social responsibility policies and its commitment to the Voluntary Principles on Security and Human Rights.

Tahoe conceded that the Court had jurisdiction over the claim but sought an order that the Court decline jurisdiction on the ground that Guatemala was the more appropriate forum. On appeal, the British Columbia Court of Appeal concluded that there was “real risk” that the claimants would suffer difficulty in receiving a fair trial against a powerful international company in Guatemala, whose mining interests aligned with the political interest of the Guatemalan state. The Court also concluded that the possible expiration of a limitation period for bringing a civil suit in Guatemala, and the limited rights to discovery there, weighed in favour of British Columbia as the more appropriate forum.

Araya v. Nevsun Resources Limited, 2017 BCCA 401

Nevsun’s indirect subsidiary (Bisha Mine Share Company) operated a gold, copper and zinc mine in Eritrea. The plaintiffs were Eritrean refugees who had been conscripted into Eritrea’s National Service Program. The plaintiffs claimed that the National Service Program was a “form of slavery”. The plaintiffs alleged that Nevsun “aided”, “abetted”, “condoned”, and “failed to prevent” the use of forced labour, slavery, torture, and other human rights abuses at the Bisha mine. It was also claimed that Nevsun was liable for the conduct of Bisha Mine Share Company.

Nevsun applied for, among other things, an order declining jurisdiction on the basis that British Columbia was not the appropriate forum. While Nevsun accepted that British Columbia had territorial jurisdiction (because Nevsun was ordinarily resident there) it argued that Eritrea was the most appropriate forum given the number of witnesses, location of evidence, distance involved, location of the alleged acts, and language barriers.

Nevsun’s application was rejected, based on evidence that the Eritrean legal system was both corrupt and controlled largely by the ruling party and national military. While the British Columbia Court of Appeal agreed that there are a number of significant difficulties associated with trying this matter in British Columbia, it nevertheless concluded that the plaintiffs faced:

the prospect of no trial at all, or a trial in an Eritrean court, possibly presided over by a functionary with no real independence from the state, (which is implicated in the case) and in the legal system that would appear to be actuated largely by the wishes of the president and his military supporters (also implicated)

The Court was also influenced by the gravity of the human rights violations alleged to have occurred, when compared against the inconvenience of holding a trial in British Columbia.

The Court of Appeal decision was appealed to the Supreme Court of Canada. The Supreme Court has not yet released its judgment and reasons.

Yaiguaje v. Chevron Corporation, 2018 ONCA 472

Unlike the cases summarized above, Chevron involved the execution of a judgment debt based on the decision of a foreign court, rather than a claim against a domestic parent for the acts of a foreign subsidiary.

In Chevron, the plaintiffs had a $9.5 billion USD judgement against Chevron Corporation in Ecuador, but Chevron Corporation had no assets there. They unsuccessfully attempted to enforce their judgement in the United States, which Chevron successfully opposed on the basis that the Ecuadorean judgement had been obtained by fraud. The plaintiffs then commenced an action in Ontario against shares and assets of Chevron Canada Limited. Chevron Canada was a subsidiary of Chevron Corporation headquartered in Calgary.

The Ontario court found it had the jurisdiction to recognize the foreign judgment and aid in executing the judgment debt. The next step was to determine whether Chevron Canada’s shares and assets would be available to satisfy the judgement debt.

The Court found that Chevron Canada’s shares and assets could not be used to satisfy the Ecuadorean judgement. On appeal, one of the plaintiffs’ key arguments was that the Court should ignore the corporate separateness of Chevron Corporation and Chevron Canada on the basis of equity. The plaintiffs submitted that the court could pierce the corporate veil “when the interests of justice demand it.” The majority Court of Appeal rejected that argument, noting that it had repeatedly rejected equity as a basis for piercing the corporate veil. The Court of Appeal reaffirmed that there are only three circumstances where the Court will pierce the corporate veil:

  1. When the court is considering statute, contract or other document;
  2. When the court is satisfied that a company is a mere façade concealing true facts; and
  3. When it can be established that a company is an authorized agent and its controllers or its members, corporate or human.

The Court of Appeal rejected the plaintiffs’ argument that, where several corporations operate closely as a group, they are in reality a single enterprise and should be responsible for each other’s debts. The majority of the Court of Appeal held:

There is good reason for this rejection. There is a difference between economic reality and legal reality. The fact that on an operational level corporate separateness is more nuanced among a group of related corporations is of no moment. It is the legal reality, as provided for in the relevant business corporation statutes, that counts. The CBCA permits subsidiary corporations but also says that each corporation is a natural person. If Parliament wished to carve out an exception to the natural first rule for subsidiaries, it would have been very easy to do so.

The plaintiffs were therefore unable to execute the Ecuadorean judgment against Chevron Canada’s assets and shares. Leave to appeal this decision was refused by the Supreme Court of Canada.

Key actions for general counsel

Given the cases summarized above and the recent Vedanta decision, consideration should be given to taking steps to assess a parent corporation’s potential exposure to liability for the acts of the subsidiaries.

Some those steps include:

  1. Examining current company policies and considering the extent to which they are or should be enforced at subsidiary level;
  2. Reassessing operational controls and practices to ensure subsidiaries respect human rights and environmental laws in their foreign operations;
  3. Considering the extent to which a parent company’s reports, statements, policies, training requirements, operational controls etc could be seen as sufficient intervention in the control and management a subsidiary’s business, such that the parent may be the subject of a direct claim by a foreign resident.

In Canada, the risk of a claim is increased materially if the foreign jurisdiction has an underdeveloped or unreliable judicial system, which is a factor Canadian courts will consider when determining whether or not to refuse jurisdiction on the basis that the matter ought to be tried overseas.

While Vedanta and the cases discussed above are not decisions on the merits, they have opened the door to foreign plaintiffs to attempt to sue domestic parent corporations within the domestic jurisdiction.

By Michael Finley, Gowling WLG

Occasional Contributors

In addition to our regular guest bloggers, Inside Internal Controls blog published by First Reference, provides occasional guest post opportunities from various subject matter experts on the topics of risk management and best practices in finance and accounting, information technology, environmental issues, corporate governance, sales/marketing and operations, not-for-profits and business related issues in Canada. If you are a subject matter expert and would like to become an occasional blogger, please contact Yosie Saint-Cyr at editor@firstreference.com. If you liked this post and would like to subscribe to Inside Internal Controls blog click here.
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