A Warning for Canadian Corporations with Foreign Subsidiaries

On July 22, 2013, the Ontario Superior Court of Justice handed down its highly anticipated decision in Choc v Hudbay Minerals Inc., 2013 ONSC 1414. Hudbay serves as a significant warning for Canadian corporations operating in foreign countries that they could potentially face civil liability in Canada for wrongs committed in foreign countries.

Background

In Hudbay, a group of indigenous peoples from Guatemala sued Hudbay Minerals Inc., a Canadian corporation, and its Guatemalan subsidiary, Compania Guatemalteca De Niquel (CGN), for alleged human rights abuses at a Guatemalan mining project owned through CGN. The Plaintiffs brought their claims in Ontario, not Guatemala.

Hudbay applied to strike the claims on the basis that the claims improperly relied on "piercing the corporate veil" or ignoring the separate corporate personalities of Hudbay, a Canadian corporation, and CGN, its Guatemalan subsidiary. Hudbay further argued that the Plaintiffs were seeking to impose a supervisory liability on parent corporations over their foreign subsidiaries.

Hudbay's applications were dismissed, and the action is allowed to proceed against it and its Guatemalan subsidiary in an Ontario Court. In particular, the Judge appears to have accepted that the Canadian parent could be directly responsible for the wrongs allegedly committed in Guatemala by CGN, based on the following:

1. Hudbay was alleged to be directly responsible and in control of key aspects of on-the-ground operations at the mining project, including responsibility over security policy and personnel and corporate response to ongoing land conflicts with the local indigenous population;
2. Hudbay was alleged to have publicly stated a commitment to implementing standards of conduct applicable to security personnel at the mine;
3. Hudbay executives were alleged to be familiar with previous forced evictions, to have known of the risks of extreme forms of violence in evicting remote communities, and to have known that its security personnel were a high risk;
4. Hudbay's managers and executives were alleged to have been advised of rising tensions regarding land conflict between the company and the indigenous population;
5. Hudbay was alleged to have known of previous violence;
6. Hudbay was alleged to have known of previous accusations of threatening acts carried out by its Chief of Security;
7. Hudbay was alleged to have made representations, including by its CEO, that Hudbay was working with local representatives and stakeholders;
8. Hudbay was alleged to have made representations that the evictions of the indigenous population had been carried out properly;
9. Hudbay was alleged to have made public statements recognizing its relationship with the indigenous population; and
10. Perhaps most importantly, Hudbay was alleged to have its own executives and employees directly in charge of on-the-ground operations, controlling community relations with farming villages on contested lands, and assuming direct responsibility and control over security at the site.

Even without these allegations of direct wrongdoing by Hudbay, the Judge was also prepared to find that the Plaintiffs may ultimately be able to tag Hudbay with liability for its Guatemalan subsidiary's acts, because the subsidiary had acted as an agent of the Canadian parent.

In the result, the motion brought by Hudbay and its subsidiary to dismiss the Action was unsuccessful. The Action will now continue to proceed in Canadian courts, against the Canadian parent, for wrongs allegedly committed at the mine site in Guatemala.

An Important Reminder for Canadian Companies with Foreign Subsidiaries

This decision serves as an important reminder for Canadian corporations with foreign subsidiaries. The advantages made available by incorporating foreign subsidiaries can be undermined if employees of the Canadian parent are directly involved in operating the foreign subsidiary, including developing its policies, speaking on its behalf, or directly engaging in on-the-ground activities. The advantages of separate corporate personality are only enjoyed where separate corporate personality is respected in theory and practice.

Companies must ensure that their carefully structured foreign operations are carried out in reality in such a way that the benefits of the foreign subsidiary structure are not completely undone. The result in Hudbay may have been quite different had all individuals involved demonstrably been employees of the Guatemalan subsidiary, rather than the Canadian parent, and had the Guatemalan subsidiary been given more autonomy over its day-to-day operations.