Jeremy Fraiberg, Mark Gelowitz, Allan Coleman, Riyaz Dattu
July 26, 2013
In a precedent-setting decision that could have important implications for Canadian companies with foreign operations, the Ontario Superior Court of Justice has allowed a lawsuit against Hudbay Minerals Inc. to proceed to trial in Ontario. The lawsuit involves allegations of human rights violations at Hudbay’s Guatemalan mining project.
On July 22, 2013, Justice Brown of the Ontario Superior Court released her decision in Choc v. Hudbay Minerals Inc., 2013 ONSC 1414 (Choc v. Hudbay), dismissing three motions brought by Hudbay and two of its subsidiaries that sought to have the case dismissed on the basis that no cause of action existed in Ontario, that one claim was brought outside the limitation period and that Ontario courts had no jurisdiction over the claim against Hudbay’s Guatemalan subsidiary.
Although liability, including compensation, will ultimately be determined at trial, the successful outcome of these motions is nevertheless significant. At trial, the Court will have an opportunity to consider the issue of Canadian corporations’ responsibility for the conduct of their foreign agents and subsidiaries.
Until August 2011, Hudbay, a Canadian mining company headquartered in Toronto, owned the Fenix mining project in eastern Guatemala through Compañía Guatemalteca de Níquel (CGN), its wholly controlled Guatemalan subsidiary. The Fenix project was a proposed open-pit nickel mining operation, which Hudbay acquired through its acquisition of Skye Resources Inc., later renamed HMI Nickel Inc.
The plaintiffs in Choc v. Hudbay are indigenous Mayan Q’eqchi’ from El Estor, Guatemala. They brought three related actions against Hudbay, CGN and HMI (the Claims), alleging that Fenix mining project security personnel working for HMI and CGN, who were under the control and supervision of Hudbay, committed human rights abuses, including murder and gang rape.
The defendants brought three preliminary motions regarding the Claims:
- a motion to strike all the Claims on the ground that it was plain and obvious that they disclosed no reasonable cause of action, according to Rule 21.01(1)(b) of the Ontario Rules of Civil Procedure (the Rule 21 Motion);
- a motion to strike one of the Claims as statute-barred by the Limitations Act (the Limitation Period Motion); and
- if the Rule 21 Motion was unsuccessful, a motion by CGN to have the Claims against it stayed or dismissed on the ground that the Court had no jurisdiction simpliciter in relation to CGN, a Guatemalan corporation (the Jurisdiction Motion).
All three motions failed for the reasons discussed below.
The Rule 21 Motion
The test for striking pleadings under Rule 21 is whether, assuming the facts set forth in the statement of claim can be proven, it is nevertheless plain and obvious that no reasonable cause of action is disclosed.
Justice Brown proceeded to assess two possible causes of action raised by the plaintiffs: (1) whether the Court should pierce the corporate veil and find Hudbay liable for the actions of its subsidiary, CGN; and (2) whether Hudbay was directly liable for the conduct of its agents abroad.
Piercing the Corporate Veil
In most circumstances, a parent corporation is seen as a legal entity distinct from a wholly owned subsidiary. Ontario courts, however, have recognized three circumstances in which a separate legal personality can be disregarded and the corporate veil pierced:
- where the subsidiary is completely dominated and controlled and being used as a shield for fraudulent or improper conduct,
- where the subsidiary is seen to be an agent, and
- where a statute or contract requires it.
Justice Brown considered only the first two grounds. She held that the fact that Hudbay allegedly engaged in wrongdoing through its subsidiary is not enough to pierce the corporate veil. Rather, the basis for the claim had to be grounded in facts that alleged that Hudbay had used CGN for the very purpose of avoiding liability for wrongful conduct. This basis for piercing the corporate veil failed because the plaintiffs had failed to plead the required facts.
Nevertheless, Justice Brown was satisfied that the plaintiffs had alleged that CGN was Hudbay’s agent at the relevant time, which if ultimately provable at trial would justify the piercing of Hudbay’s corporate veil. Justice Brown noted that “whether or not this agency relationship is ultimately found to have existed at the relevant time, the allegation is not patently ridiculous or incapable of proof, and therefore must be taken to be true for the purposes of this motion.”
The plaintiffs also alleged that Hudbay owed a duty of care to the plaintiffs and should be held liable in negligence for its own actions and omissions in Guatemala. In particular, they claimed that Hudbay was, itself, negligent in failing to prevent the harm committed by the Fenix mining project’s security personnel against the plaintiffs.
The plaintiffs did not argue that there was an established duty of care that applied to their situation. For this reason, Justice Brown applied the test for establishing a novel duty of care, as originally set out by the House of Lords in Anns v. Merton London Borough Council (the Anns Test).1 According to this test, the following must be proven:
- The harm complained of was a reasonably foreseeable consequence of the alleged breach;
- There is sufficient proximity between the parties and it would not be unjust or unfair to impose a duty of care on the defendants; and
- There exist no policy reasons to negate or otherwise restrict the duty.
Taking the plaintiffs’ pleadings as proven for the purposes of the motion, Justice Brown found that the plaintiffs had pleaded that Hudbay/Skye knew various facts that made it reasonably foreseeable that Hudbay’s authorization of the use of the security personnel in forced evictions or in response to peaceful opposition from the local community could lead to acts of violence and the harm allegedly suffered by the plaintiffs.
Regarding the issue of proximity, Justice Brown held that, on the basis of the facts alleged in the plaintiffs’ pleadings, it would not be unjust or unfair to impose a duty of care on the defendants. In particular, it was claimed that Hudbay/Skye had made public representations concerning its relationship with local communities and its commitment to respecting human rights, which would have led to expectations by the plaintiffs. Moreover, the plaintiffs’ interests were clearly engaged when the defendants initiated a mining project near the plaintiffs’ community and allegedly requested that they be forcibly evicted.
Finally, on the policy issues militating against this novel duty of care, both the plaintiffs and the defendants advanced several competing arguments. The defendants argued, among other things, that this new duty of care would risk exposing any Canadian company with a foreign subsidiary to a myriad of meritless claims and would likely impinge upon the fundamental principle of separate corporate personality entrenched in the common law and in corporate statutes. The plaintiffs made a number of counter-arguments, including that local communities should not have to suffer without redress when adversely affected by the business activity of a Canadian corporation operating in their country. Justice Brown concluded that the presence of clearly competing policy considerations in recognizing the proposed duty of care would indicate that it was not plain and obvious that the plaintiffs' claims should fail on the last part of the Anns Test.
The Limitation Period Motion
The defendants claimed that one of the Claims was statute-barred by the Limitations Act, because it was brought outside the two-year limitation period under the Act. However, Justice Brown dismissed this motion on the basis that the claim at issue was exempted from the two-year requirement due to an exception in the Act for claims based on sexual assault.
The Jurisdiction Motion
CGN conceded that, if the Rule 21 Motion was unsuccessful, the company would be a necessary and proper party to the Claim. Therefore, Justice Brown dismissed the Jurisdiction Motion without further analysis.
The Role of International Law
International law and international frameworks on business and human rights played a secondary, but relevant, part in the decision and may become a significant element during the trial of the Claims.
Amnesty International Canada (Amnesty) was an intervener in Choc v. Hudbay and provided submissions on the Voluntary Principles on Security and Human Rights, which were established in 2000 and set out norms for corporate conduct in the extractive industry when corporations engage public and private security forces to protect business interests in conflict- or violence-prone areas. Amnesty also referred to the following international instruments:
- OECD Guidelines for Multinational Enterprises;
- The United Nations’ Protect, Respect and Remedy: Framework for Business and Human Rights; and
- United Nations Guiding Principles on Business and Human Rights
These international guidelines and principles are increasingly being relied on by multinational corporations operating abroad. Effective implementation of these guidelines may prevent human rights violations from occurring and can mitigate corporations’ exposure to legal liability.
It is also relevant to note that these international norms on business and human rights may become important elements in informing the content of legal standards. For instance, in Choc v. Hudbay, Justice Brown referenced Hudbay’s public statements regarding its compliance with international human rights standards, including the Voluntary Principles, as one of the factors establishing the proximity between Hudbay and the plaintiffs as part of the Anns Test.
The plaintiffs in Choc v. Hudbay were successful in challenging the defendants’ motions, opening the way to a trial on the merits of the actions. In addition to complex evidentiary issues, the trial will involve hard questions of legal policy and law in establishing a novel duty of care. If successful, however, Choc v. Hudbay may usher in potential expanded exposure to risks and liabilities for Canadian corporations doing business abroad, not only in the natural resources sector but also in various other sectors, including banking, manufacturing, retailing and telecommunications.
For the full, but as yet unreported, decision, please click here.
1  A.C. 728; adopted by the Supreme Court of Canada in Kamloops (City of ) v. Nielson,  2 S.C.R. 2
Authored by Mark Gelowitz, Jeremy Fraiberg, Riyaz Dattu, Allan Coleman, Luiz Bihari