Why parent companies may soon be unable to claim immunity from their subsidiary’s liabilities

A new look at corporate social responsibility

June 25, 2019 12:51 PM EDT

The corporate veil — the hallowed legal concept that separates the personality and liabilities of a parent company from that of its subsidiaries — is coming under attack as courts around the world struggle with the ever-extending reach of multinational organizations.

While Canadian courts and others have been gnawing away at the edges of the veil in recent years, the U.K. Supreme Court recently struck what may be the most telling blow so far when it allowed 1,800 Zambian villagers to continue with a lawsuit against U.K.-based mining company Vedanta Resources Plc over alleged pollution emanating from the Nchanga copper mine owned and operated by Konkola Copper Mines, Vedanta’s Zambian subsidiary.

Although traditional corporate law protected Vedanta from the liabilities of KCM, the court ruled in April that the parent had intervened in the management of the mine to such an extent that it may have attracted a “duty of care” to the villagers.

As evidence of the “high level of control and direction” exercised by Vedanta, the court pointed to public statements in which the company lauded its group-wide environmental controls and sustainability standards, and its implementation of these controls and standards throughout the corporate group.

“There is an increasing belief on the part of policymakers that we need to take a new, harder look at the legal concepts that govern multinationals and families of corporations,” said Julie Rosenthal, a lawyer at Goodmans LLP in Toronto. “And this is a belief that is being reflected in the jurisprudence.”

While the Supreme Court did not decide whether a duty of care had in fact been established and whether it had been breached, it concluded that the issue called for a trial on the merits.

Although Canadian and English courts have historically recognized that parents can be liable for subsidiaries who have “in substance taken over the management of the subsidiary,” the Vedanta case goes further.

As the U.K. Supreme Court saw it, a parent’s liability is also engaged when the parent has advised a subsidiary as to “how it should manage a particular risk.” This included laying down “group-wide policies” that contain “systemic errors” or taking “active steps” to have subsidiaries implement the policies. Indeed, the court went so far as to state that a parent could be liable to third parties harmed by subsidiaries even if it merely “holds itself out” as exercising a degree of supervision over the subsidiary.

“The decision signals a broadening of liability that a parent company may incur to those who are harmed by the actions of a subsidiary,” Rosenthal said. “It’s not a sea change in the law, but it is an incremental step towards a new look at corporate social responsibility.”

While decisions of U.K. courts do not bind Canadian judges, they have historically been highly influential. That’s significant because Canadian courts have arguably been trending in the same direction. So while our judges have not gone so far as to pierce the corporate veil or to adopt a broad approach to the “duty of care,” they have been reluctant to summarily dismiss claims against parents based on wrongs committed by subsidiaries in foreign jurisdictions.

As far back as 2013, the Ontario Superior Court refused to dismiss a case against Hudbay Minerals Inc. in which 13 Mayans alleged that security personnel working for Hudbay’s subsidiaries at the Fenix mining project in Guatemala engaged in rape and murder. The plaintiffs claimed that Hudbay was responsible both because it owed a duty of care in negligence and because the Guatemalan subsidiaries were effectively Hudbay’s agents.

More recently, in 2017, the British Columbia Court of Appeal allowed a claim by Guatemalan nationals to go to trial in Canada against Tahoe Resources even though the shootings by security guards that were the subject of the lawsuit had occurred at mines owned by subsidiaries. The Supreme Court of Canada refused to grant leave to appeal.

Conversely, in April 2019, the same Supreme Court refused leave to appeal a 2018 judgment of the Ontario Court of Appeal that enjoined 47 Ecuadorian villagers representing 30,000 others from proceeding with a lawsuit to collect a $9.5 billion judgment against Chevron Canada — a judgment that the plaintiffs had been unable to enforce against the company’s parent, Chevron Corp., the perpetrator of the alleged wrongs.

Chevron, however, differed from Vedanta and previous Canadian cases because it involved the liability of a subsidiary for the act of its parent rather than the liability of a parent for the act of its subsidiary — who in the normal course has no control over the actions of its parent.

As well, Justice Ian Nordheimer, who agreed with the other two judges in the Court of Appeal that the veil should not be pierced in the Chevron case, expressed some concern that it be treated with a degree of flexibility going forward.

“Is this court prepared to recognize that there may be situations where equity would demand a departure from the strict application of the corporate separateness principle in the context of the enforceability of a valid judgment, whether foreign or domestic?” Nordheimer wrote. “I suggest that … question should be answered in the affirmative while, at the same time, recognizing that the situations where such a remedy will be appropriate are likely to be rare and exceptional.”

At the very least, then, there appears to be a crack in the traditional armour of the corporate veil.

“The emerging trend that has seen international plaintiffs permitted to proceed with claims against Canadian parent companies for the allegedly wrongful activity of their foreign subsidiaries means that the corporate veil is no longer a silver bullet to the heart of a plaintiff’s case,” says Michael Finley, a lawyer in Gowling WLG’s Toronto office.

Lee McBride, in Gowling’s London, U.K. office, says that two cases, involving Royal Dutch Shell Plc. and Unilever Plc, which are on their way to the U.K. Supreme Court, may do much to advance the jurisprudence and give the business community greater certainty regarding the impact of the Vedanta decision.

Some 1,600 employees of Unilever Tea Kenya Limited, a Kenyan-incorporated subsidiary, are seeking to include Unilever PLC, the U.K. domiciled parent company, in a U.K. lawsuit alleging that Unilever Tea Kenya failed to protect them from a foreseeable risk of ethnic violence.

Meanwhile, Nigerian citizens are claiming damages against Royal Dutch Shell Plc and its local subsidiary, Shell Petroleum Development Company of Nigeria Limited, for alleged pollution and environmental damage caused by oil leaks from pipelines and other infrastructure. The plaintiffs are relying on the same “duty of care” argument put forward in Vedanta to attach liability to Royal Dutch.

“What we’re hoping is that the court will lay down clear guidelines as to when a parent is responsible for the conduct of its subsidiary,” McBride said.

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