Corporate Veil Preserved: Court Dismisses Action Against Canadian Subsidiary in Chevron Case

On January 20, 2017, in Yaiguaje v. Chevron Corporation, the Ontario Superior Court of Justice (Commercial List) (Court) dismissed the plaintiffs’ action to execute against the shares and assets of Chevron Canada Limited (Chevron Canada) in satisfaction of a judgment of a foreign court. In doing so, the Court reaffirmed principles of corporate separateness and confirmed the high threshold that must be met in order to pierce the corporate veil.

BACKGROUND

This decision is latest step in an Ontario action commenced in 2013 by 47 Ecuadorian residents seeking recognition and enforcement of a US$9.51-billion judgment rendered against Chevron Corporation (Chevron Corp.) by an Ecuadorian court. In addition to naming Chevron Corp. (a United States domiciled corporation) as a defendant, the plaintiffs also named Chevron Canada, a seventh-level indirect subsidiary of Chevron Corp. In the Ontario action, the plaintiffs did not allege any wrongdoing against Chevron Canada, an operating company that had no connection to the legal proceedings in Ecuador. Rather, the plaintiffs sought to execute against the shares and assets of Chevron Canada in satisfaction of the foreign judgment against Chevron Corp.

Chevron Canada and Chevron Corp. initially contested whether the Ontario courts had jurisdiction over the proceeding. These challenges were resolved in September 2015 when the Supreme Court of Canada (SCC) upheld the Ontario Court of Appeal decision that the Ontario courts had jurisdiction over the action for recognition and enforcement of the foreign judgment against Chevron Corp. where Chevron Canada was also named as a defendant. For more information, see our September 2015 Blakes Bulletin: Supreme Court of Canada Addresses Recognition, Enforcement of Foreign Judgments in Chevron Case.

Although the SCC held that the Ontario courts had jurisdiction over the recognition and enforcement action, it went on to make clear that its ruling did not determine the issue of whether Chevron Canada was a distinct corporate personality from Chevron Corp. or whether its shares or assets were available to satisfy the Ecuadorian judgment against Chevron.

Justice Hainey’s recent decision arises from competing motions for summary judgment in respect of the plaintiffs’ claim as against Chevron Canada, brought by each of Chevron Canada, Chevron Corp. and the plaintiffs.  At the same time, the plaintiffs also brought a motion to strike the defences pleaded by Chevron Corp. in its statement of defence, alleging that the defences raised were not permitted defences to an action for recognition and enforcement of a foreign judgment.

NATURE OF THE CLAIM AGAINST CHEVRON CANADA

The plaintiffs advanced two main arguments in support of its claim as against Chevron Canada:

  • Chevron Canada is an asset of Chevron Corp. that is exigible and available for execution and seizure pursuant to the Execution Act to satisfy the Ecuadorian judgment against Chevron Corp.
  • In the alternative, the principle of corporate separateness should not apply to shield Chevron Canada’s shares and assets from being available to satisfy the Ecuadorian judgment

REASONS FOR DECISION

The Court rejected the plaintiffs’ arguments relating to the claims made as against Chevron Canada and granted the defendants’ motions for summary judgment, dismissing the plaintiffs’ claims against Chevron Canada.

On the first argument, the Court held that the Execution Act does not make Chevron Canada’s shares and assets exigible and available for execution and seizure in satisfaction of an Ecuadorian judgment against Chevron Corp., absent a finding that Chevron Canada’s corporate veil should be pierced for this purpose. The Court stated that Chevron Canada is not an asset of Chevron Corp. It is a separate legal person. In reaching its conclusion that the Execution Act does not give Chevron Corp. any interest in the shares or assets of Chevron Canada, the Court agreed with Chevron Corp.’s submission that were the plaintiffs’ position regarding the effect of the Execution Act to be accepted, the assets of Ontario subsidiaries would always be subject to execution orders to satisfy judgments against their parent companies. This result would not only be contrary to law, it would have “startling and stark consequences” for Ontario’s businesses and their ability to attract investment.

On the second argument, the Court noted that the principle of corporate separateness provides that shareholders of a corporation are not liable for the corporation’s obligations and that the corporation’s assets are owned exclusively by the corporation, not by its shareholders. The Court reaffirmed the two elements that must be established to pierce the corporate veil: complete domination and control of the subsidiary corporation (in that it does not, in fact, function independently) and wrongdoing akin to fraud in the establishment or use of the corporation. The Court found that the plaintiffs failed to establish either element in this case. Additionally, the Court rejected the plaintiffs’ arguments that there is an independent “just and equitable” exception to the principle of corporate separateness and rejected the plaintiffs’ submission that Chevron Canada’s corporate veil should be pierced on a theory of enterprise group liability.

In respect of the plaintiff’s motion to strike the defences pleaded by Chevron Corp. in its statement of defence, the Court concluded that, with certain exceptions, the defences raised constituted permissible pleadings.

IMPLICATIONS

The decision confirms the fundamental principle of corporate separateness in Canadian law. Furthermore, the decision reaffirms the very high threshold that will have to be met before a court will pierce the corporate veil.

However, given the legal history of this dispute, it remains to be seen whether this decision will represent the final word on these issues in Canada in this proceeding.


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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