Canadian Class Action Defence Blog

Developments across the pond: Will the UK courts’ expansion of parent company liability be adopted in Canada?

Mar 22, 2021 7 MIN READ
Authors
Kevin O’Brien

Partner, Disputes, Toronto

Since the English case of Saloman v. Saloman & Co in 1896, the common law has generally protected a parent company from sharing in the liability of its subsidiaries. In that case, the House of Lords upheld the concept of separate corporate legal personality, which protects shareholders (including parent companies) from liability for the debts of the company. Since then, Canadian courts have allowed this “corporate veil” to be pierced only in limited circumstances.

However, in Okpabi v Royal Dutch Shell, the United Kingdom Supreme Court (“UKSC”) held that a parent company may be directly liable in negligence for the actions of its subsidiaries. Okpabi reinforces the recent trend in English law which suggests that the potential scope of parent company liability in negligence is expanding.

The potential scope of parent company liability has direct consequences for class action litigants. Foreign parent companies are often named as defendants alongside their Canadian subsidiaries, as we have recently seen in a hotel privacy class action[1] and a credit card fee class action[2]. Okpabi provides a roadmap for where the law may be heading in Canada and clues as to the type of circumstances in which a parent company may be held liable in negligence for the actions of its subsidiary.

Parent company liability in Canada

The test for when courts in Canada will “pierce the corporate veil” was articulated in Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co.[3] The court held that there were three circumstances in which a parent company may be held liable for its subsidiary’s obligations:

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

This test was recently reaffirmed by the Court of Appeal for Ontario, which held that these three situations are the “three circumstances where the court will pierce a corporate veil”.[4]

To prove that a company is a “mere façade” for which its parent company is liable, a plaintiff must prove that “there is complete control of the subsidiary, such that the subsidiary is the ‘mere puppet’ of the parent corporation [and] the subsidiary was incorporated for a fraudulent or improper purpose or used by the parent as a shell for improper activity”.[5]

Unsurprisingly, this is a difficult test to meet and one that strongly protects the principle of corporate separateness.

However, plaintiffs in Canada have recently been advancing arguments that parent companies should be held liable for the actions of their subsidiaries by a means other than piercing the veil – i.e., directly in negligence for the actions of their subsidiaries.

For example, in Choc v. Hudbay Minerals Inc,[6] the plaintiffs alleged that Hudbay was directly liable in negligence for human rights violations committed by its subsidiaries. The defendants brought a motion to strike the pleadings in negligence, but the court dismissed the motion. It held that although the plaintiffs’ claim in direct negligence against the parent company was novel, it was not plain and obvious that the plaintiffs’ claims could not succeed. The Court allowed the claims in negligence to proceed.

The dispute in Hudbay remains on-going and the plaintiffs were recently given leave to amend their claim against Hudbay to include “further particulars, additional facts and clarifications regarding the Plaintiffs' claims against Hudbay in negligence”.[7]

English approach to parent company liability in negligence

A few recent English appellate cases[8] have explored the circumstances in which parent companies may be directly liable in negligence for the actions of their subsidiaries. For example, in Lungowe v Vedanta Resources, the UKSC held that a parent company may be liable in negligence for the actions of its subsidiary in the following circumstances:

  • Where the parent company has implemented and imposed group-wide environmental and safety policies on all of its subsidiaries and where the parent “takes active steps, by training supervision and enforcement, to see that they are implemented by the relevant subsidiaries”.[9]
  • Where the parent company has published materials claiming that it exercises a degree of supervision and control over its subsidiaries “even if it does not in fact do so” because in “such circumstances its very omission may constitute the abdication of a responsibility which it has publicly undertaken.”[10]

Most recently, in Okpabi v Royal Dutch Shell[11], the UKSC considered claims advanced by a Nigerian farming and fishing community and Nigerian individuals. The plaintiffs alleged that they suffered damages caused by the negligent operation of oil pipelines by the Shell Petroleum Development Company of Nigeria Ltd (“SPDC”). SPDC is a Nigerian registered subsidiary of Royal Dutch Shell (“RDS”), a UK company.

The plaintiffs alleged that RDS was liable in negligence because “it exercised significant control over material aspects of SPDC’s operations and/or assumed responsibility for SPDC’s operations, including by the promulgation and imposition of mandatory health, safety and environmental policies, standards and manuals which allegedly failed to protect the [plaintiffs] against the risk of foreseeable harm arising from SPDC’s operations.”[12] Put simply, the plaintiffs alleged that RDS interfered in the management of SPDC’s operations to a such a degree that RDS owed a common law duty of care to the plaintiffs directly.

The main issue before the Court was whether there was a “real issue to be tried” as against RDS such that the claim against RDS could continue to trial. In other words, the issue was whether the direct negligence claim advanced by the plaintiffs was capable of succeeding.

The Court held that whether a parent company may be liable for the negligence of its subsidiary “depends on the extent to which, and the way in which, the parent availed itself of the opportunity to take over, intervene in, control, supervise or advise the management of the relevant operations (including land use) of the subsidiary.”[13] In England, “there is no special test” for determining whether a parent company is liable for the activities of its subsidiary.[14]

The Court allowed the claim to proceed to trial. It held that two of the plaintiff’s allegations, if true, may be sufficient to make RDS liable for the actions of SPDC.

First, RDS allegedly implemented defective group-wide safety and environmental policies related to the relevant activity and allegedly took steps to ensure their implementation.

Second, RDS allegedly took over the management or joint management of the relevant activity of SPDC. The plaintiffs alleged that although the Shell group of companies were comprised of separate corporations, the group’s operations were structured vertically “along Business and Functional lines rather than simply according to corporate status”.[15] They argued that this vertical structure means that the businesses of the different corporations “are, in management terms, carried on as if they were a single commercial undertaking, with boundaries of legal personality and ownership within the group becoming irrelevant”.[16]

Expanding scope of parent company liability in Canada

It remains to be seen to what extent the direct negligence arguments of the plaintiffs in Hudbay,  Vedanta and Okpabi will be successful in Canadian courts at trial. Nonetheless, these types of direct negligence claims signal that the potential scope of parent company liability, both generally and in class actions, may be expanding beyond the limited situations in which courts will pierce the corporate veil. The decisions in Vedanta and Okpabi, and the types of situations explored in these cases which may give rise to direct parent company liability in negligence, should be considered by Canadian class action litigants as they may foreshadow the approach to these issues ultimately adopted in Canada.

 


[1] Winder v. Marriott International Inc., 2019 ONSC 5766

[2] Bancroft-Snell v. Visa Canada Corporation, 2019 ONCA 822

[4] Yaiguaje v. Chevron Corporation, 2018 ONCA 472 [Chevron] at para 65; Daniel Carlos Lusitande Yaiguaje, et al. v. Chevron Corporation, et al., 2019 CarswellOnt 5162 leave to appeal to the SCC denied.

[5] Chevron supra note 1 at para 66.

[6] 2013 ONSC 1414

[7] Caal Caal v. Hudbay Minerals Inc., 2020 ONSC 415 at para 33.

[8] AAA v Unilever plc, [2018] EWCA Civ 1532 at para 36; Lungowe v Vedanta Resources plc [2019] UKSC 20.

[9] Vedanta at para 53.

[10] Vedanta at para 53.

[11] Okpabi v Royal Dutch Shell, [2021] UKSC 3 [Okpabi].

[12] Okpabi at para 7.

[13] Okpabi at para 25.

[14] Okpabi at para 27.

[15] Okpabi at para 156.

[16] Okpabi at para 157.