• Douglas W. Judson

Ontario court refuses to lift corporate veil to enforce foreign judgment against Canadian subsidiary

This blog post was originally published by McCarthy Tétrault LLP. |


In the latest chapter of the Yaiguaje v. Chevron litigation,[1] the Ontario Superior Court of Justice has refused to pierce the corporate veil to enforce a foreign judgement against a Canadian subsidiary that was obtained against its parent company. The summary judgment decision (cited as 2017 ONSC 135) rejects a “flagrantly opposed to justice” fairness-based exception to corporate separateness, restoring commercial certainty to corporate ownership structures. The decision also signals the court’s sensitivity to forum shopping.


Background


The defendants are Chevron Corporation (“Chevron”) and Chevron Canada Limited (“Chevron Canada”). Chevron is a public company incorporated in the United States. Chevron directly holds no assets in Canada.[2] Chevron Canada is a subsidiary of Chevron incorporated federally and headquartered in Calgary, with assets across Canada.[3] It is a seventh­-level subsidiary of Chevron.[4]

The plaintiffs in this matter represent 30,000 Ecuadoreans.[5] The plaintiffs seek to enforce a US$9.5 billion judgment they obtained against Chevron from an Ecuadorean court in 2011.[6] The underlying dispute concerns oil extraction activities which took place in Ecuador. As a result of these development activities, the region suffered environmental pollution that impacted local residents. Texaco Inc. operated in Ecuador from 1964 to 1992, and merged with Chevron in 2000. Chevron no longer has assets in Ecuador. Chevron Canada has never carried on business in Ecuador and has no connection to the legal proceedings in Ecuador.[7]


The plaintiffs were successful in litigation against Chevron in Ecuador in 2011. In 2012, they commenced an action in Ontario for the recognition and enforcement of their judgement. The matter was eventually heard by the Supreme Court of Canada (the “SCC”), which determined that an Ontario court “has jurisdiction to adjudicate a recognition and enforcement action against Chevron that also names Chevron Canada as a defendant.”[8]The SCC stated that its reasons did not determined whether Chevron Canada had a separate corporate personality from Chevron or whether its assets were available to satisfy the Ecuadorean judgment – thus setting the stage for the current litigation.[9]


Corporate Separateness and Execution


In his reasons, Justice Hainey reinforced the doctrine of corporate separateness. He sided with the defendants, concluding that the shares and assets of Chevron Canada were notavailable to satisfy the Ecuadorian judgment. Hainey stated that Chevron Canada was not an asset of Chevron, but a separate legal person. He cited the SCC’s landmark decision in BCE v. 1976 Debentureholders, which indicated that shares do not confer a right to the underlying assets of an ongoing corporation.


Similarly, Hainey determined that the Execution Act did not create a cause of action against Chevron Canada, which is not the debtor to the Ecuadorian judgement.[10] He found that the Act did not create any rights in property, but merely provided for the seizure and sale of property in which a judgment-debtor already has a right or interest. In general, Canadian execution legislation does not allow the assets of an indirect subsidiary of a judgment-debtor to be seized by a creditor unless the test for piercing the corporate veil can be satisfied.[11]


Piercing the Corporate Veil


Having determined that Chevron Canada’s assets were not assets of Chevron and its shares were not available for execution, Hainey turned to the matter of whether the corporate veil ought to be lifted. He rejected the plaintiffs’ arguments, specifically concluding that there was no “just and equitable” means to piercing the corporate veil available.


The plaintiffs had argued that the corporate veil could be pierced where (i) corporate separateness would result in an injustice or default on a legal obligation or (ii) there exists a sufficient degree of relationship between a parent and subsidiary is economically significant or the entities are practically “one enterprise”. They relied on the SCC jurisprudence to support the position that the corporate veil can be lifted when failing to do so would yield a result “too flagrantly opposed to justice” and that corporate separateness will not be respected where the true relationship is one of a group enterprise or singular business entity.[12]


Hainey rejected these assertions. He stated that while subsidiaries are creatures of their parent companies, they must be treated as separate legal entities. He stated that the principle of corporate separateness provides that shareholders of a corporation are not liable for the obligations of the corporation, just as the assets of the corporation are owned by the corporation and not by its shareholders. Hainey maintained that, in general, corporate separateness will only be disregarded where an entity is “completely dominated and controlled and being used as a shield for fraudulent or improper conduct.” ‘Complete control’ requires more than ownership or receipt of profits, but rather that the subsidiary does not function independently.[13] The wrongdoing must be akin to fraud.[14]


The plaintiffs failed to substantiate these factors. They did not allege that the corporate structure was designed as an instrument of any wrongdoing, or that Chevron Canada was a “puppet” of Chevron. Hainey granted the motion for summary judgment and dismissed the claim against Chevron Canada.


Takeaways


This decision stands as a strong affirmation of the longstanding principle of separate corporate personalities at law. It restores commercial certainty to a corporate law landscape that was somewhat shaken after the SCC’s earlier Chevron decision.[15]


The decision also reflects the court’s goal of disincentivizing forum shopping, in which parties seek favourable jurisdictions to enforce judgments or pursue claims. In this regard, Hainey’s reasoning stands in notable contrast to the B.C. Court of Appeal in the recent decision of Garcia v. Tahoe Resources Inc., in which the court ruled that the Vancouver-based defendant had not proven Guatemala was a more appropriate forum for the Guatemalan plaintiffs to bring their lawsuit.


While it is unclear at this juncture whether either Tahoe or the Ecuadorian plaintiffs will appeal their respective decisions, what is clear is that corporate counsel will be watching this litigation with interest.


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[1] To-date, the line of judicial decisions includes: Yaiguaje v. Chevron Corporation, 2013 ONSC 2527 [Chevron (2013 ONSC)]; Yaiguaje v. Chevron Corporation, 2013 ONCA 758 [Chevron (2013 ONCA)]; Yaiguaje v. Chevron, 2015 SCC 42 [Chevron (2015 SCC)]; Yaiguaje v. Chevron, 2017 ONSC 135 [Chevron (2017 ONSC)].

[2] Chevron (2017 ONSC) at para. 33.

[3] Chevron (2017 ONSC) at para. 14: The claim against the defendant Chevron Canada Finance Limited has been discontinued.

[4] Chevron (2017 ONSC) at para. 13: Chevron Canada’s shares are wholly-owned by Chevron Canada Capital Corporation, which the plaintiffs have brought a motion to add as a defendant. The reasons in Chevron (2017 ONSC) do not address this motion.

[5] Chevron (2017 ONSC) at para. 6.

[6] Chevron (2017 ONSC) at para. 5: The Ecuadorean judgement was obtained against Chevron in 2011. It was originally in the amount of US$18 billion, which was upheld by the Ecuadorean intermediate appellate court in 2012, and reduced to US$9.5 billion by Ecuador’s National Court of Justice in November 2013.

[7] Chevron (2017 ONSC) at paras. 11-12.

[8] Chevron (2015 SCC) at para. 22. See also Chevron (2013 ONSC); Chevron (2013 ONCA).

[9] Chevron (2015 SCC) at para. 95, cited in Chevron (2017 ONSC) at para. 20.

[10] Chevron (2017 ONSC) at paras. 36-37.

[11] Chevron (2017 ONSC) at paras. 40-46.

[12] Chevron (2017 ONSC) at paras. 53-56, citing Kosmopoulos v. Constitution Insurance Co., [1987] 1 S.C.R. 2 at pp. 10-11 and Bazley v. Curry, [1999] 2 S.C.R. 534, among others.

[13] Chevron (2017 ONSC) at para. 63, citing Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 28 O.R. (3d) 423 (Gen. Div.).

[14] Chevron (2017 ONSC) at para. 64.

[15] Chevron (2015 SCC).

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