Ruling in Chevron has impact abroad

Court refuses to enforce Ecuadorean judgment against Chevron Canada, finding it is separate entity

THE ONTARIO SUPERIOR COURT of Justice has put a dent in the viability of corporate social responsibility principles — especially of resource companies operating abroad — with its recent refusal to enforce an Ecuadorean judgment worth $9.51 billion against Chevron Corp. by ordering the seizure of assets belonging to its seventh-level indirect subsidiary Chevron Canada Ltd., which has no connection to the Ecuadorean proceedings.

But Justice Glenn Hainey’s January decision in Yaiguaje v. Chevron goes beyond that. It’s also a huge relief for Canada’s business community at large.

Indeed, had the plaintiffs succeeded in their enforcement application, which depended on demolishing the defendants’ submission that the Chevron parent and subsidiary were “distinct corporate personalities,” the decision would have turned corporate law on its ear.

But Hainey refused to pierce the corporate veil, affirming longstanding principles that this should occur only where the parent had complete domination and control of the subsidiary, and fraud in the establishment or use of the corporation had been proven. These principles, Hainey noted, are now enshrined in the Canada Business Corporations Act.

Larry Lowenstein of Osler, Hoskin & Harcourt LLP in Toronto, who represented Chevron Corp., says that Hainey’s reasons bear up under scrutiny.

“Justice Hainey’s reasons are a very careful and comprehensive affirmation of bedrock principles of corporate law as to the separateness of parent and subsidiary,” he says. “His reasons summarily dismiss the argument that the interests of justice can override corporate protection in the case of a fully-fledged viable subsidiary that has done nothing wrong.”

But the plaintiffs have appealed to Ontario’s appellate court. Alan Lenczner of Lenczner Slaght Royce Smith Griffin LLP in Toronto, who was co-counsel for the plaintiffs, calls portions of Hainey’s judgments “completely off the rails” and “completely nuts.” The notice of appeal challenges Hainey’s conclusion that Chevron Canada was not an asset of its parent and maintains Hainey misinterpreted the Supreme Court of Canada’s landmark judgment in BCE v. 1976 Debentureholders.

BCE does not say that when you have a judgment against a company, you can’t seize the corporation and sell its assets,” Lenczner says. “The corporate veil is intended to protect personal assets, but it was never intended that a company can further insulate its own assets simply by creating a subsidiary.”

In support of this argument, Lenczner maintains that Hainey made serious errors in determining the relationship between parent and subsidiary.

“[Hainey’s] error emanates from the lack of examination and advertence to the strict policies of Chevron Corp. and the 7,000 pages of documents implementing those policies, which demonstrate that every material aspect of Chevron Canada’s exploration and production business was subject to Chevron Corp.’s approval and control,” the notice of appeal states.

The appeal also challenges Hainey’s conclusion that Ontario’s Executions Act was merely a procedural statute and did not allow for seizure of the assets of a judgment debtor’s wholly owned subsidiary. If the statute were in fact purely procedural, Lenczner argues, it would be “unnecessary” because a judgment debtor’s directly owned assets can be seized. “The Act is, by its words and by judicial application, of wider reach,” the notice of appeal states.

The appeal is just the latest step along a lengthy and tortuous path through Ecuadorean and US courts, which snaked its way to Ontario’s doorstep in 2013. The case began when Ecuadorean villagers suffered environmental pollution as the result of oil companies’ activities from the 1960s to the 1990s. The villagers obtained a $9.5-billion judgment in an Ecuadorean court.

Chevron, which had no assets in Ecuador, refused to pay the judgment. US courts found the judgment to be fraudulent and unenforceable by US courts. In 2013, the plaintiffs sought relief against Chevron Corp. and Chevron Canada in Ontario. The companies contested the jurisdiction of Ontario courts all the way up to the Supreme Court of Canada, which determined that such jurisdiction did exist.

Both the plaintiffs and defendants then brought motions for summary judgment regarding the claim against Chevron Canada. Hainey dismissed the case against the Canadian subsidiary and allowed Chevron Corp. to maintain the defences it had raised in its own right.

If the history of this case is any indication, however, Ontario’s appellate court may not be the last stop on this journey. As it did previously, the SCC may loom on the horizon in what could become a turning point in the history of Canadian corporate law and corporate social responsibility.