Directors Owe No Duty To Foreign Residents

by Dentons
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Originally Published in Legal Alert, Vol. 31, No. 5.

Directors of Canadian companies with operations outside of Canada can take comfort in the Ontario Court of Appeal’s recent decision in Piedra v. Copper Mesa Mining Corporation. In that decision, the court dismissed an appeal by three residents of Ecuador from a decision striking their claims against Copper Mesa Mining Corporation (“Copper Mesa” or the “Company”) and two of its directors (the “Directors”). The claims had been stricken for failing to disclose a reasonable cause of action.

Broadly speaking, the plaintiffs had alleged that the Company and the Directors were negligent in not preventing alleged assaults by the Company’s security forces against the plaintiffs. In its decision, the court canvassed a director’s duty of care to foreign residents for acts of the corporation outside of Canada and determined that any claims by such plaintiffs must be specifically pleaded against the defendants.

Background

The plaintiffs were citizens of Ecuador who had opposed the exploration and development of an open-pit copper mine adjacent to several small villages in the Junín area of Ecuador (the “Junín Project”). The project was being developed by subsidiaries of Copper Mesa, a junior mining company incorporated under the laws of British Columbia. Copper Mesa’s shares were listed on the TSX.

The plaintiffs alleged that Copper Mesa’s subsidiaries subjected the plaintiffs and other local villagers to a campaign of intimidation, harassment and violence carried out by locally hired security forces. The plaintiffs claimed that the Directors knew of local opposition to the project (including the potential for violence) but failed to take any steps to prevent the violence from occurring.

The defendants brought a motion to strike the plaintiffs’ claims under Rule 21.01 of the Rules of Civil Procedure on the basis that the claims disclosed no reasonable cause of action. The motion judge agreed and dismissed the action. The plaintiffs appealed to the Court of Appeal.

Claim against the Directors

The plaintiffs argued that the Directors were personally liable for the torts committed by Copper Mesa’s subsidiaries. As a result of a meeting with community members, the Directors had knowledge of local opposition to the Junín Project and, according to the plaintiffs, failed to use that knowledge to prevent the harassment and violence experienced by the local villagers.

The plaintiffs relied on Copper Mesa’s prospectus disclosures and other publicly available documents as further evidence of the Directors’ knowledge about the potential for conflict surrounding the Junín Project. The court concluded that the claim against the Directors disclosed no reasonable cause of action as the foreseeability and proximity requirements to establish a duty of care were not satisfied by the plaintiffs’ pleadings. The court reaffirmed the principle that a director’s personal liability for the acts of the corporation is limited except when the director’s personal actions are themselves tortious.

In this case, there was no direct connection between the violence in Ecuador and the Directors. Moreover, there was no factual basis to suggest that the Directors had committed any personal wrongdoing.

Choice of defendants

The court commented that the plaintiffs’ choice of defendants highlighted the weakness of the connection between the incidents of violence in Ecuador and the Directors named in the action. The court questioned the decision not to include as defendants in the action the perpetrators of the alleged torts in Ecuador, Copper Mesa’s subsidiaries and their management teams, as well as other Copper Mesa officers or directors.

Further, the plaintiffs decided not to advance a direct claim against Copper Mesa as the parent company. Instead, the plaintiffs indirectly claimed against Copper Mesa on the basis of vicarious liability for the claims made against the Directors.

Significance

It remains to be seen whether this action would have survived the motion to strike the claims if the plaintiffs had chosen to name other defendants in the action, for example, Copper Mesa’s subsidiaries and their management teams. The plaintiffs’ choice not to include these potential defendants may have resulted from a concern that, had these defendants been included, the plaintiffs may have faced a jurisdictional challenge, given that these defendants have no apparent connection with Ontario.

Several Canadian companies, particularly those in the resource and mining industries, carry on business in foreign jurisdictions and may face opposition to development projects from local residents for various reasons.

Ultimately, the Court of Appeal’s decision establishes that bald, generalized claims against directors for the alleged wrongful acts of agents or employees in foreign jurisdictions are insufficient to sustain a cause of action against them. It is not enough to assert liability against a director simply because of the director’s position. Instead, if plaintiffs wish to pursue a claim, they must set out particularized allegations regarding the director’s knowledge, specific wrongful acts or failures to act, to maintain a claim.

This article was co-authored with FMC’s John Zerucelli. It was originally published in Legal Alert, Vol. 31, No. 5 and is republished with permission of Carswell, a division of Thomson Reuters Canada Limited.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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