Introduction

Yaiguaje v Chevron Corporation¹ , released on May 23, 2018, is the most recent decision of the Court of Appeal for Ontario (the “Court”) in that proceeding, which has already been the subject of a number of procedural decisions (including appellate decisions) addressing, for example, jurisdiction and security for costs.² The latest decision of the Court addresses questions concerning the interpretation of the Execution Act³ and when a court may pierce the corporate veil. The questions were raised in the context of the appellants’ attempts to enforce an Ecuadorian judgment against Chevron Corporation in Ontario (the “Ecuadorian Judgment”).

The appellants argued that the Execution Act permits execution by them on Chevron Canada’s shares and assets to satisfy the Ecuadorian Judgment (Chevron Canada being a seventh-level subsidiary of Chevron Corporation, against whom the Ecuadorian Judgment was made). In the alternative, they argued that the Court should pierce the corporate veil in order to render Chevron Canada’s shares and assets exigible to satisfy the Ecuadorian Judgment. The majority of the Court rejected both arguments. First, the majority found that the Execution Act is a purely procedural statute that did not create new substantive rights against Chevron Canada. Secondly, the majority found that the facts of this case did not meet the requirements of the existing two-part test for piercing the corporate veil, and rejected the appellants’ submission that the Court should expand the circumstances in which the court should pierce the corporate veil.

In a concurring decision, Justice Nordheimer would have developed the two-part test for piercing the corporate veil to allow equity to be a relevant factor in whether the corporate veil should be pierced. However, His Honour found that even on a test based in equity, the corporate veil should not be pierced in this case, given concerns about the underlying Ecuadorian Judgment following findings by United States courts that there was evidence of fraud used to obtain the judgment.

Background

Between 1964 and 1992, a company that would later become part of Chevron Corporation explored and extracted oil in Ecuador. The appellants are indigenous villagers who obtained a 9.5 billion USD judgment against Chevron Corporation in Ecuador in connection with alleged environment harm (the Ecuadorian Judgment). The appellants commenced an action in the United States, where Chevron Corporation was based, in order to recover against Chevron Corporation’s assets there. However, the United States District Court for the Southern District of New York refused to enforce the judgment on the grounds that the appellants’ counsel in the Ecuadorian proceedings had engaged in fraudulent conduct.⁴

Having been unable to enforce the judgment in the United States, the appellants commenced an action in the Ontario Superior Court of Justice to enforce the Ecuadorian Judgment against Chevron Corporation’s Canadian subsidiary, Chevron Canada.

The Court affirms corporate separateness

The main issues on appeal were (i) whether the Execution Act allows the appellants to enforce the Ecuadorian Judgment on Chevron Canada; and (ii) in the alternative, whether the Court should pierce the corporate veil to allow enforcement against Chevron Canada.

The appellants argued that the Execution Act applied to Chevron Canada’s shares and assets, and sought a declaration that those shares and assets were exigible under the Execution Act. The Court rejected this line of reasoning, emphasizing that the Execution Act was a purely procedural statute, and did not create new substantive rights. Since Chevron Corporation did not have an existing legal right to the assets of Chevron Canada, those assets were not exigible under the Execution Act (as assets belonging to Chevron Corporation).

The majority emphasized principles of corporate separateness and the distinction between a corporation and its shareholders. Relying on BCE Inc. v Debentureholders,⁵ the majority reiterated that shareholders only have a right to the assets of a corporation if and when it is wound up. While the corporation is ongoing, shareholders have no such right. It followed that if Chevron Corporation had no right to Chevron Canada’s assets, then neither did Chevron Corporation’s creditors.

The appellants also argued that the Court should pierce the corporate veil “when the interests of justice demand it”.⁶ In that regard, both the majority and concurring reasons focused on Justice Wilson’s remarks in Kosmopoulos v Constitution Insurance Co.: ⁷

The law on when a court may disregard this principle by “lifting the corporate veil” and regarding the company as mere “agent” or “puppet” of its controlling shareholder or parent corporation follows no consistent principle. The best that can be said is that the “separate entities” principle is not enforced when it would yield a result “too flagrantly opposed to justice, convenience or the interests of the Revenue.”⁸

The majority read Justice Wilson’s remarks as reflecting an older view of corporate law that had since been eclipsed by the decision of Justice Sharpe in Transamerica Life Insurance Co. of Canada v Canada Life Assurance Co. ⁹ In that case, the Court held that, in order to lift the corporate veil because a subsidiary corporation is a mere façade that protects its parent corporation, the plaintiff must establish both that (i) the parent corporation had complete control of the subsidiary; and (ii) that the subsidiary was incorporated for a fraudulent or improper purpose.¹⁰

The appellants submitted that Chevron Corporation had an indirect beneficial interest in Chevron Canada because it had full ownership of shares through cascading intermediary subsidiaries. However, since the appellants did not attempt to argue, and would have failed in arguing, that Chevron Canada was incorporated for fraudulent purposes, the majority decision affirmed the motion judge’s decision refusing to pierce the corporate veil and upholding the corporate separateness between Chevron Canada and Chevron Corporation. The majority relied on Sun Indalex Finance v United Steelworkers¹¹ for the proposition that there was no standalone just and equitable exception to the principle of corporate separateness and concluded that the law must “evolve on a principled basis and in a manner that brings certainty and clarity, not in a way that sows confusion and is devoid of principle.”¹²

By contrast, Justice Nordheimer would have placed greater emphasis on Justice Wilson’s statement in applying the test for piercing the corporate veil. He explained that Justice Wilson. “had ‘no doubt’ that the [corporate] veil could be lifted to do justice”,¹³ for example, where a judgment creditor would suffer injustice if the court did not step in.

Justice Nordheimer explained that the court’s power to pierce the corporate veil stemmed from its equitable jurisdiction. In his opinion, equity must ameliorate the harshness of positive law in order to harmonize law with the needs and requirements of evolving social structures and relationships. Barring any explicit prohibition in the case law or statutes, the court should have the power “to pierce the corporate veil in those extraordinary situations where liability has been established but the judgment creditor is nevertheless left without any remedy because of the judgment debtor’s internal corporate structure.”¹⁴

Ultimately, however, Justice Nordheimer concurred with the majority in concluding that the Court should not pierce the corporate veil in this case, as the equities of the case were not clear. Of particular concern was the finding of the United States courts that the Ecuadorian Judgment was the result of a fraud. Therefore, the Court was unanimous in the result, dismissing the appeal, and holding that the appellants were not entitled to enforce the Ecuadorian Judgment as against the assets of Chevron Canada.

Conclusion

This recent decision from the Court affirms the principle of corporate separateness and the Transamerica two-part test for piercing the corporate veil, even in the context of enforcing a foreign judgment.  The practical result of this decision is that it will remain difficult to enforce both foreign and domestic judgments against any entity other than the underlying judgment debtor, unless the two part test for piercing the corporate veil can be met. While the concurring judgment by Justice Nordheimer may someday provide a springboard for expanding the role of equity in the test for lifting the corporate veil, this is not yet certain. It may also be that the Supreme Court of Canada will have the chance, if it so chooses, to weigh in on whether these corporate law principles should develop in the ways sought by the appellants.

This article was co-authored by Honghu Wang, a summer student based in Dentons’ Toronto office.