Yaiguaje v. Chevron Corporation - The Ontario Court of Appeal Does Not Pierce the Corporate Veil, but the Concurring Minority Questions the Principle of Corporate Separat
The issues at stake
The Ontario Court of Appeal recently released its decision in Yaiguaje v Chevron Corporation, perhaps putting an end to the long, drawn-out litigation between Ecuadorian plaintiffs, Chevron Corporation (“Chevron”) and Chevron Canada.
The Court of Appeal found that the lower court correctly decided that the plaintiffs could not pierce the corporate veil and enforce an Ecuadorian judgment against Chevron against Chevron’s seventh-level subsidiary, Chevron Canada.
However, while the majority dismissed the appeal and rejected the appellants’ argument that it ought to be entitled to pierce the corporate veil on “just and equitable grounds”, the concurring minority found that such a ground for piercing the corporate veil might very well exist, but that it such a ground was just not available to the appellants on the facts of this case.
How the proceeding made it to the Court of Appeal
In 2011, the Ecuadorian plaintiffs obtained a 9.5 billion USD judgment in Ecuador against Chevron for environmental damages relating to its past operations in Ecuadorian region of Orienté. The judgment, however, was empty, as Chevron no longer had any assets in Ecuador. As a result, the plaintiffs sought to enforce the judgment against Chevron in the United States. The enforcement proceeding was dismissed, as the New York Court found that the Ecuadorian judgment was invalid, having been obtained through fraud.
In 2013, the plaintiffs sought to enforce the judgment in Ontario against Chevron Canada, a seventh-level subsidiary of Chevron. In 2015, the Supreme Court of Canada affirmed Ontario’s jurisdiction to hear the enforcement proceeding.
Shortly thereafter, the defendants, Chevron and Chevron Canada, moved for summary judgment dismissing the plaintiffs’ claim against Chevron Canada on the grounds that that its shares were not an exigible asset of Chevron, nor could the plaintiffs pierce the corporate veil and enforce the judgment against Chevron Canada’s assets. Justice Hainey of the Superior Court of Justice agreed with the Chevron companies and dismissed the plaintiffs’ claim. It is from that decision that the plaintiffs appealed.
The majority’s decision
The appellants advanced two primary arguments on appeal:
- That the Execution Act permits execution of Chevron Canada’s shares and assets to satisfy the Ecuadorian judgment against Chevron, and;
- The Court should pierce the corporate veil in order to render Chevron Canada’s shares and assets exigible.
Justice Hourigan, writing for the majority, ultimately rejected these arguments on the basis that they “ignore[d] more than twenty years of jurisprudence” and cautioned that if the Court were to accept the appellants’ submissions, “it would result in significant changes to fundamental principles of our corporate law and the law of execution.”
Chevron’s shares are not exigible
Justice Hourigan found that it was legally impossible to grant the appellants’ request for a declaration against Chevron Canada that the shares of its company were exigible. The Execution Act is procedural and does not purport to grant substantive rights to judgment creditors. Simply put, it was not enough that Chevron had an “amorphous indirect right” to the assets of Chevron Canada. Rather, there must be an existing substantive legal right that permits seizure of the assets.
The Court also found that if the appellants’ submissions were accepted on this issue, a judgment creditor would have greater rights to the issuing corporation’s assets than a judgment debtor shareholder because access would occur while the corporation was ongoing (as opposed to when it was wound-up). Moreover, if the Court granted the appeal, it would mean that the assets of Ontario subsidiaries of both domestic and foreign companies would automatically and always be subject to execution orders to satisfy the judgment of parent companies. The Court refused to permit that outcome.
Part of the Court’s analysis considered the expectations of corporations that operate in Ontario. The Court determined that stakeholders of those corporations (creditors, shareholders, employees, etc.) rely on the doctrine of corporate separateness when they do business with these corporations. The expectation of those stakeholders is that they need only consider the liabilities of that corporation, and not the liabilities of all of the related corporations, when doing business with them. Those expectations should not be altered by the Court.
There is no “just and equitable ground” for piercing the corporate veil
Next, the court addressed the appellants’ argument that the Court has the ability to pierce the corporate veil when the interest of justice demand it.
The majority bluntly dismissed this argument, stating that the court has “repeatedly rejected an independent just and equitable ground for piercing the corporate veil”, while at the same time protecting the principle of corporate separateness. The Court found that the veil may be pierced when “courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct.” Both elements of the test must be met. In this case, they were not.
Particularly troubling for the Court was the appellants’ assertion that the rigorous corporate separateness doctrine ought to be relaxed in cases involving enforcement of a judgment debt, as opposed to cases of first instance where the Court is tasked with determining liability. The Court found that such an argument ‘”dangerously resembles” the enterprise theory of liability, in which several corporations that operate closely as a ‘group’ are in reality a single entity and should accordingly be responsible for the others’ debt. The Court found that the extent of liability under the enterprise theory would introduce an “intolerable” level of uncertainty, and was therefore untenable.
Further, the Court found no merit in the appellants’ policy reasons for lifting the corporate veil, finding that the equities in the case were far from clear (recall that the New York court found that the Ecuadorian judgment was obtained through fraud).
In the end, the Court re-affirmed the test for piercing the corporate veil and rejected the independent “just and equitable” grounds for doing so. While the majority conceded that the rules for piercing the corporate veil can and will evolve, it must do so on in a “principled manner that certainty and clarity, not in a way that sows confusion and is devoid of principle”.
The concurring minority’s decision
While concurring with the outcome of the majority’s decision, Justice Nordheimer took issue with the majority’s approach to the corporate separateness doctrine.
Unlike the majority, Justice Nordheimer held that the jurisprudence may allow for the corporate veil to be pierced in situations where equity would demand a departure from the strict application of the corporate separateness principle. This includes situations where liability was not in issue, such as in the context of the enforceability of a valid judgment.
Justice Nordheimer relied on the phrase that equity is the “conscience of law”, and found that the jurisprudence was not clear enough in its pronouncement to limit the Court’s inherent equitable powers to pierce the corporate veil in extraordinary situations. Such a situation may occur where liability has been established, but the judgment creditor remains without a remedy because of the judgment debtor’s internal corporate structure.
While Justice Nordheimer was of the view that such an element to the test for piercing the corporate veil existed, the facts and equities of this particular case did not warrant it.
Is a crack forming in the principle of corporate separateness?
Corporations with assets in Ontario whose related entities operate abroad should feel comforted by the fact that a majority of the Province’s highest court was not prepared, as the majority stated, to “sacrifice certainty in the law for expediency” and pierce the corporate veil.
While ultimately the dissent’s position is not binding on lower courts, it does leave the door open for future debate as to whether an independent “just and equitable ground” for piercing the corporate veil is available to parties looking to enforce both foreign and domestic judgments against related corporations.
This may very well be an issue that the Supreme Court of Canada will be called upon to address. Check back here for our analysis should it do so.
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