Canada: Parent Corporation Liability For Foreign Subsidiaries

Last Updated: October 22 2001

Article by Waldemar Braul and Paul Wilson

A. Introduction

Environmental liability is increasingly an international concern. This is especially evident in judicial decisions holding parent corporations liable for environmental damages caused by their foreign subsidiaries. This article discusses several precedent-setting cases in Canada, the United States and Europe. These cases show that Courts will hold parent corporations liable for the environmental sins of their subsidiaries by piercing the parent’s corporate veil or assigning tort liability directly to the parent company.

B. The Amoco Cadiz Decision

In 1978, the Amoco Cadiz tanker grounded on the coast of France and spilled its cargo of crude oil, damaging the marine environment. The French government, French individuals, businesses and associations sued the owner of the Amoco Cadiz, Amoco Transport Company ("Amoco Transport"), and its American parent Standard Oil Company ("Standard Oil") in the Northern District Court of Illinois (the jurisdiction of Standard Oil)1.

The Court found that Amoco Transport, a Liberian corporation, was merely a nominal owner of the Amoco Cadiz and that Standard Oil controlled the design, construction, operation and management of the tanker and treated it as if it belonged to Standard Oil. The Court found Standard Oil liable in tort for its negligent supervision of its subsidiaries. Additionally, the Court saw little rationale for treating Standard Oil differently from its subsidiaries, which were treated as mere "instrumentalities". The negligence of the subsidiaries was therefore assigned directly to the parent.

C. The Canadian Beazer Decision

A noteworthy Canadian parent-subsidiary environmental case is Beazer and Atlantic v. Environmental Appeal Board 2, decided by the British Columbia Supreme Court in late 2000. The litigation concerned a 1997 order by the British Columbia environmental regulator. The order directed a Pittsburgh company to remediate a contaminated site formerly owned by its subsidiary. The subsidiary no longer existed at the time of the order; it was amalgamated after the contaminating activities took place. The regulator therefore issued the order jointly against the successor company and the parent company, expressly stating that the parent corporation was a past "operator" of the site. The Waste Management Act 3 states that an "operator" means "a person who is or was in control of or responsible for any operation located at a contaminated site . . .".

On appeal to the Environmental Appeal Board, the parent corporation relied on well-entrenched case law treating parent and subsidiary corporations as separate legal entities, each responsible for their own liabilities. The regulator, in response, argued that this case law was immaterial, given the Waste Management Act’s definition of "operator". The Environmental Appeal Board agreed with the regulator and found that the parent corporation had used numerous types of control over the subsidiary corporation, including some which had a direct effect on the operations at the subsidiary’s site. As a result, the Board concluded that these controls collectively placed the parent corporation into the shoes of an "operator".

The British Columbia Supreme Court upheld the decision of the Board. The Court held that the Board correctly found that there were many indicia of actual control of the site by the foreign parent corporation and, collectively, the effect of the control was to render the parent an "operator" of the site and thus was properly named in the remediation order. The Court also clarified that the parent corporation was not an "owner" (another class of person who could be named in an order) merely on account of owning the shares in the subsidiary.

D. The Canadian United Canadian Malt Decision

Also in 2000, the Ontario Superior Court of Justice, in United Canadian Malt Ltd. v. Outboard Marine Corp. of Canada4, allowed a tort claim to proceed against an American parent corporation. The plaintiff claimed that its property had been contaminated by leachate originating from property formerly owned by a (still-operating) Canadian subsidiary of an American corporation. The plaintiff claimed damages against the Canadian subsidiary, its individual directors and officers and the American parent corporation. The individual directors and officers and the American parent corporation brought a motion to strike out the statement of claim as disclosing no reasonable cause of action against them.

The Court acknowledged that the claim against the American parent corporation was in essence "an attempt by the plaintiff to ‘pierce the corporate veil’ and thereby fasten liability on the parent corporation for the actions of its subsidiary." The legislation in Ontario does not provide a British Columbia-type definition of "operator", but this did not prevent the Court from concluding that a parent corporation can be held liable for the subsidiary on the basis of the control it exercises. In particular the Court noted that the plaintiff had an arguable case that the parent "controlled" the subsidiary by the following activities:

  • the American parent "managed, directed and controlled" the closure and clean-up of the property;
  • the American parent, in other contexts, had represented that it was responsible for the environmental problem, that the Canadian subsidiary had no authority to deal with the problem and, that any and all decisions regarding the problem would be made by the American parent alone; and
  • the American parent, subsequent to the discovery of the contamination problem, stripped all of the assets out of the Canadian subsidiary.

As a result, the plaintiff’s case was allowed to proceed to trial (which has not yet been held).

E. The US Bestfoods Decision

Under the United States’ Comprehensive Environmental Response, Compensation and Liability Act 5 (CERCLA), any person owning or operating a facility at the time a hazardous substance is released to the environment in an unsanctioned manner is strictly liable for the removal and remediation costs associated with the resulting clean-up. The statute and its legislative history offer little guidance on who is considered an "operator," and the Courts have reached mixed conclusions about when parents become liable as "operators".

The US Supreme Court’s 1998 decision in United States v. Bestfoods6, while not involving a foreign subsidiary, is an instructive source of guidance for anticipating parent-subsidiary liability. The Court held, as a basic principle, that a parent corporation cannot be found liable under CERCLA for a subsidiary’s environmental practices merely on account of its active involvement in the subsidiary’s general affairs. This principle has two exceptions, the Court noted. One exception arises where a corporate parent is derivatively liable. That is, the corporate veil between the parent and subsidiary may be pierced where the corporate form would otherwise be misused to accomplish wrongful purposes (e.g., fraud). The Court found no wrongful purpose in this case.

The second exception arises where the parent corporation is directly liable as an "operator" based on the parent’s relationship to the facility (not merely based on the parent’s financial or legal relationship to the subsidiary). The test for direct liability of a corporate parent is "whether, in degree and detail, actions directed to the facility by an agent of the parent alone are eccentric under accepted norms of parental oversight of a subsidiary’s facility."

The Court gave several examples to contrast "accepted norms" with "eccentric" acts. The Bestfoods decision, however, will likely not be the final judicial word on parent liability. The following questions remain unanswered:

  • Is it sufficient for a parent to require its subsidiaries to follow its environmental compliance program in order to avoid liability attaching to the parent?
  • Would liability attach to the parent if it implements policies that require only certain hazardous waste haulers or disposal facilities be used by its subsidiaries?
  • Would it be considered "eccentric" if the parent’s environmental manager conducts environmental compliance meetings at the subsidiary’s facility?

Bestfoods, although not binding on Canadian Courts, was considered by the British Columbia Supreme Court in Beazer. The Court recognized but noted the difference in the relevant legislation. The Court implied that a higher degree of legislative guidance was provided in the British Columbia legislation:

"the U.S. legislation does not have meaningful definition of the terms ‘owner’ or ‘operator’. The U.S. Supreme Court was required to give meaning to those terms without any assistance from the legislative body."

F. The Canadian Cambior Decision

The Canadian case of Recherchés Internationales Quebec v. Cambior Inc.7 involved a Canadian parent and environmental claims arising from its subsidiary in Guyana. In 1998, 23,000 Guyanese attempted to sue Cambior Inc. in a Quebec class action for $69 million for damages from the 1995 release of 3.2 billion litres of cyanide-laced waste into the Essiquibo River. Omai Gold Mines Limited, a Guyanese corporation, owned the mine at the time. Montreal-based Cambior Inc. owned 65% of the Guyanese corporation.

The Court was satisfied that it had jurisdiction to hear the class action, if granted, because Cambior had significant control over the foreign mine (i.e. it had apparently made decisions in Quebec relating to the construction and operation of the mine, and financed the study which determined that the mining project would be economically feasible).

This finding, however, was a hollow victory for the claimants. The Court found that the Guyana Courts would be a more convenient forum for hearing the tort claim. The Court noted, for example, that the mine and spill effects were in Guyana, the claimants live there, witnesses to the disaster resided mostly in Guyana, and the voluminous documentary evidence was developed in Guyana.

G. The US Bhopal Decision

In 1986, the Government of India and victims of the 1984 factory explosion in Bhopal, India sued New York-based Union Carbide Corporation in the U.S. Federal Court.8 The factory was owned by Union Carbide India Ltd. whose majority shareholder was the Union Carbide Corporation. The New York Court declined jurisdiction to hear this tort claim, stating that "the Indian legal system is in a far better position than the American Courts to determine the cause of the tragic event and thereby fix liability." Aside from noting that the majority of witnesses and evidence were in India, the Court cited the potentially heavy administrative burden on the American tribunal and the high cost to American taxpayers as further factors for hearing the claims in India. The Court nonetheless ruled that Union Carbide "must agree to satisfy any judgement rendered by an Indian Court."

H. The English Cape Asbestos Decision

The English House of Lords recently ruled on whether South African residents could sue in English Courts for tort damages arising in the South African asbestos mines owned by a subsidiary of an English parent corporation9. More than three thousand South Africans sought standing to sue London-based Cape PLC for negligent control of its South African subsidiaries. Cape PLC owned the South African holding company, Cape Asbestos South Africa (Pty.) Limited ("CASAP"), which in turn owned the asbestos mines in South Africa’s Northern Cape Province. The claim involves asbestosis and cancers attributable to exposure to asbestos in the CASAP mines before 1979. Cape PLC ended its operations in South Africa in 1979.

The House of Lords unanimously decided that all the claimants could sue the parent company in England. The House of Lords found that this case concerns the responsibility of the parent company for ensuring the observance of proper standards of health and safety by its overseas subsidiaries. The Court noted that the trial would require particular attention to the parent’s role in the operations of the subsidiaries, whether directors and employees of the parent had knowledge, what actions were taken or not taken by the parent and whether the defendant owed a duty of care to the employees of the subsidiary companies. The evidence, the Court concluded, was documentary in nature and would most likely be found in the offices of the parent corporation. In addition, the Court found it significant that the parent company and its subsidiaries and assets are no longer present or available to be sued in South Africa.

I. CONCLUSION

As international trade becomes even more pervasive, corporations need to pay particular attention to the growing case law on the governance of parent and subsidiary corporations. The Courts have demonstrated a willingness to apply corporate and tort law principles in sometimes flexible ways to give remedies to foreign victims of environmental damage. The Courts, for example, are willing to pierce the corporate veil in environmental matters where the parent corporation has exerted too much control over the subsidiary, the facility or even just the site that caused the damage. The Cambior and Cape Asbestos illustrate that the Courts may also hold a parent liable under negligence where the parent knew or ought to have known that the activities of the subsidiaries would cause damage.

FOOTNOTES

  1. Re Oil Spill By The Amoco Cadiz Off The Coast of France On March 16, 1978, MDL Docket No. 376 ND Ill. 1984, American Maritime Cases, 2123-2199.
  2. (2000), Vancouver Registry Doc. L001638 (B.C.S.C.). The full case can be seen at www.courts.gov.bc.ca/jdb-txt/sc/00/16/s00-1698.htm.
  3. R.S.B.C. 1996, c. 482, as amended.
  4. (2000), 34 C.E.L.R. (N.S.) 116.
  5. 94 Stat. 2767, as amended, 42 U.S.C. 9601 et seq.
  6. 118 S. Ct. 1876 (1998).
  7. [1998] Q.J. No. 2554.
  8. In Re Union Carbide Gas Plant Disaster at Bhopal, India in December 1984 634 F Supp. 842 (SDNY 1986), affd & mod. 809 F 2d 195 (2nd Dist, 1987).
  9. [2000] 4 All E.R. 268.

 

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