The Just and Equitable Exception to Piercing Corporate Veil

After the Supreme Court of Canada’s 2015 decision in Chevron Corp. v. Yaiguaje, where the Court affirmed the ability of our legal system to hear foreign enforcement actions, the matter has returned to the Ontario Superior Court. The original stay by Justice Brown in 2013 was set aside by the Court, but the issue of the corporate separateness what not addressed until now.

A series of summary judgments, heard together, and a separate decision to amend the statement of claim further to add Chevron Canada Capital Company (“CCCC”), were recently released, shedding light on whether the corporate veil should be pierced in this situation.

The amended statement of claim does not plead that Chevron Canada was a party to the Ecuadorian action or an agent of Chevron. Instead, they claimed that Chevron Canada was “a necessary party to this action in order to achieve equity and fairness.” The CCCC amendment sought to add them as a party to seek the same relief as Chevron Canada, and because it is the 100% shareholder of Chevron Canada.

The main issues before the court on the summary judgment were as follows:

  1. Are the shares and assets of Chevron Canada exigible and available for execution and seizure pursuant to the Execution Act to satisfy the Ecuadorian judgment against Chevron?
  2. If they are not, should Chevron Canada’s corporate veil be pierced so that its shares and assets are available to satisfy the Ecuadorian judgment against its indirect parent, Chevron?

The basis for the plaintiff’s claim was s. 18(1) of the Execution Act, which provides for seizure or sale of “property, interest or equity of redemption in or in respect of any goods, chattels or personal property.”

The plaintiffs pointed to the complicated structure of the defendants, involving of 1,500 subsidiary companies around the world, and noted that Chevron itself did not did not generate any revenue. Their income is entirely derived from 1005 owned subsidiaries, who themselves carry out the actual business. In this case, there were seven layers of subsidiaries between Chevron and the business entity carrying out activities in Ecuador.

However, Justice Hainey rebuffed many of these arguments with some basic principles of corporate law,

[36] Chevron Canada is not an asset of Chevron. It is a separate legal person. It is not an asset of any other person including its own parent, CCCC. The Supreme Court of Canada confirmed this in BCE Inc. v. 1976 Debentureholders, where the court stated, “While the corporation is ongoing, shares confer no right to its underlying assets.”

[47] A plain reading of the Execution Act makes it clear that it does not create any substantive rights that override or supplant the long-established principle of corporate separateness.

He relied on Belokon v. Krygyz Republic and held that the Execution Act was a procedural mechanism that does not create any rights in property. The Act cannot apply because Chevron Canada is not the judgment-debtor in the Ecuadorian action.

He also adopted the defendants’ position that if this interpretation of the Act was accepted, the exposure of the assets of Ontario subsidiaries to satisfy judgments by parent companies “would have startling and stark consequences for Ontario’s businesses and their ability to attract investment.”

Justice Hainey stated, in his summary on the motion to amend, “Chevron Canada’s shares and assets are not exigible and available for execution and seizure by the plaintiffs in satisfaction of the Ecuadorian judgment against Chevron Corporation.” For the same reason, he also dismissed the motion to add CCCC as a party to the proceedings.

Once the corporate separateness of the parties was established, the next issue was whether the corporate veil should be pierced in this instance. The plaintiffs relied on the Court’s statement in Kosmopoulos v. Constitution Insurance Co.,

12. As a general rule a corporation is a legal entity distinct from its shareholders: Salomon v. Salomon & Co., [1897] A.C. 22 (H.L.) The law on when a court may disregard this principle by “lifting the corporate veil” and regarding the company as a 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”: L. C. B. Gower, Modern Company Law (4th ed. 1979), at p. 112…

13. There is a persuasive argument that “those who have chosen the benefits of incorporation must bear the corresponding burdens, so that if the veil is to be lifted at all that should only be done in the interests of third parties who would otherwise suffer as a result of that choice”: Gower, supra, at p. 138…

They also relied on the group enterprise principle, as explained in 801962 Ontario Limited v. MacKenzie Trust Co., [1994] O.J. No. 2105 (Gen. Div.), as cited in Teti and ITET Corp. v Mueller Water Products,

These decisions [Manley and others] do not support a claim that the test in Salomon v. Salomon has been superseded by a new “business entity” or “single business entity” test. They merely illustrate the principle that, in particular fact situations where the nature of the legal issue in dispute makes it appropriate to have regard to the larger business entity, the court is not precluded by Salomon from doing so. In a few cases, there are statements that the court will lift the corporate veil” where injustice would otherwise result”. I am not able to conclude that such statements are intended to remove the authority of the Salomon principle. I think they may be more in the nature of a shorthand formulation reflecting the approach of the courts in the cases discussed above.
[emphasis in the original]

The plaintiffs provided a number of reasons why the corporate veil should be lifted in this instance, including the potential injustice to the 30,000 indigenous people in Ecuador whose lives were affected by the polluting activity. Chevron had complete effective control over Chevron Canada, and should therefore be responsible, once liability is established.

However, Justice Hainey rejected all of these submissions, concluding, “Chevron Canada’s corporate veil should not be pierced for this purpose.” He relied on the English Court of Appeal decision in Adams v. Cape Industries Plc., [1990] Ch. 433 (C.A.), 

There is no general principle that all companies in a group of companies are to be regarded as one. On the contrary, the fundamental principle is that “each company in a group of companies … is a separate legal entity possessed of separate legal rights and liabilities.”

Our law, for better or worse, recognizes the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entities with all the rights and liabilities which would normally attach to separate legal entities.

Justice Hainey referred to the piercing of the corporate veil test in Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co., but also to the Ontario Court of Appeal’s recent decision in Indcondo Building Corporation v. Sloan, which affirmed that this veil will only be pierced with wrongdoing akin to fraud in the establishment or use of the corporation.

He concluded there was no independent “just and equitable” exception principle for corporate separateness, and rejected the theory of enterprise group liability in this case because Chevron Canada had no involvement in the activities in Ecuador that were in dispute. No case since Kosmopolous has followed the “just and equitable” test, something the court in Transamerica made note of.

Because the plaintiffs did not allege any fraud or wrongdoing against Chevron Canada, they were unable to meet this fundamental condition of piercing the corporate veil. Justice Hainey referred to Justice Brown’s earlier findings that the corporate structure had been in place since 1966, and was not a recent creation specifically designed to evade judgment, adopting his statement in 2013 as follows,

[104] In my view, when taken as a whole, the evidence filed on these motions supports a finding that the relationship between Chevron and Chevron Canada is, to echo the language of Sharpe J. (as he then was) in the Transamerica case, “that of a typical parent and subsidiary”, not an instance of a parent corporation exercising complete domination and control over the subsidiary. Or, to phrase that conclusion in the language of the Court of Appeal in the Canada Life Assurance case, the evidence demonstrates that Chevron Canada “looks as though it has its own business, rather than being completely subservient to and dependent upon its parent”.

Though separate from the comity issue explored more fully by the Supreme Court of Canada, this decision ultimately has the effect of denying the plaintiffs satisfaction of their Ecuadorian judgment. There is some reason to have concern over this finding on its face, even if the technical application of the law was correct in this case.

The original defendants no longer have any assets in Ecuador. Attempts to satisfy judgment in the U.S. were frustrated by unproven allegations of corruption around the Ecuadorian judgment. The Canadian actions were only initiated out a need to identify some jurisdiction which could satisfy the original judgment, and provide some restitution to the impoverished villagers in Ecuador.

The facts in this case are also worth highlighting, as explained in the previous SCC decision,

[4] The dispute underlying the appeal originated in the Lago Agrio region of Ecuador. The oil-rich area has long attracted the exploration and extraction activities of global oil companies, including Texaco, Inc. (“Texaco”). As a result of those activities, the region is said to have suffered extensive environmental pollution that has, in turn, disrupted the lives and jeopardized the futures of its residents. The 47 respondents (“plaintiffs”) represent approximately 30,000 indigenous Ecuadorian villagers. For over 20 years, they have been seeking legal accountability as well as financial and environmental reparation for harms they allegedly have suffered due to Texaco’s former operations in the region. Texaco has since merged with Chevron.

Not only is this a case of ethically questionable generation of profits by developed nations from developing ones, it is also a case about environmental pollution and the lack of accountability. As our international commerce continues to grow and become more complicated, there is a need to have some accountability for actions overseas and greater corporate social responsibility at home.

I have previously described on such type of statutory mechanism in a discussion at The Court,

Bill C-300, An Act respecting Corporate Accountability for the Activities of Mining, Oil or Gas in Developing Countries, goes into its Third Reading this Fall Session, and is scheduled for its first hour of debate on the very first day that MPs return to session, September 20, 2010. The Standing Committee on Foreign Affairs and International Development (FAAE) has already heard evidence on this Private-Member’s Bill. And rather than create a statutory cause of action as sought by the Plaintiffs in this case, the Act would provide the Minister of Foreign Affairs and the Minister of International Trade the responsibility of holding corporations accountable by submitting annual reports to the House and Senate. For now, this is the appropriate balance that the elected representatives of Canadians have identified. If through their reports they identify a pressing and compelling problem, a carefully-tailored Canadian version of the American Alien Tort Claims Act might be appropriate, but until then foreign citizens lack standing to issue such claim, and Ontario courts lack jurisdiction to hear them.

Bill C-300 was not passed (by 6 votes), which was touted as a “win” by some mining companies and their counsel. Richard Janda, who has addressed many of the flawed arguments used in Bill C-300’s defeat, states,

Bill C-300 was situated at a critical threshold in the elaboration of corporate fiduciary responsibilities. That threshold involves connecting voluntary business initiatives that respond to market imperatives with government participation in markets shaped in part by general justice considerations. Whereas corporations are quite comfortable now putting in place complex and sometimes expensive CSR “products” that can be used to manage risk and reduce long-term costs, they are less comfortable being held financially accountable for their justice footprint since they do not view themselves as purveyors of justice or injustice. Bill C-300 told them that financing was conditional on justice–or at least on the avoidance of injustice.

He suggests that corporations should prefer strategies of engagement, transparency and acknowledgement, including the recognition that a justice burden should be faced as part of ongoing responsibility.

Lucie Lamarche explains in Canadian Lawyer why such measures are especially needed in Canada, home to 75 per cent of the largest exploration and mining companies in the world,

International law, with the exception of international criminal law, does not impose human rights obligations directly on corporations. Under international human rights law, states themselves have international legal duties to protect the human rights of individuals subject to their jurisdiction.

However, for a number of reasons host states may be unable or unwilling to regulate the conduct of foreign companies, even where such conduct violates the host state’s international human rights obligations.

 

 

Lamarche notes that there have been serious allegations made against Canadian companies, including independent findings of complicity of violence on civilians in the vicinity of capital projects. Surely the use of corporate subsidiaries and distinct legal personalities should not shelter against accountability in these cases, especially where there is some form of capital flight before proceedings can be brought.

Although the Chevron Corp. v. Yaiguaje case may have failed to impart broader lessons of responsibility for commercial exploits abroad, these discussions will inevitably to catch up with our rapidly developing notions of corporate social responsibility. When it does, we are also likely to revisit our understandings of corporate separateness, and appropriate circumstances for piercing the corporate veil. History books will see Chevron Corp as one of those early harbingers for the need for corporate legal reform.

Comments

  1. Mr. Ha-Redeye is right to state that the Ontario court correctly applied the law and principles of “corporate separateness” to exclude Chevron Canada from efforts to enforce an Ecuadorian judgment against Chevron Corp. However, he made several factual errors and omissions to mistakenly conclude that this is a case of “ethically questionable” profits or a “lack of accountability.”

    He erroneously claims that “attempts to satisfy judgment in the U.S. were frustrated by unproven allegations of corruption around the Ecuadorian judgment.” In fact, no U.S. enforcement action has been brought. The Ecuadorian judgment creditors have not chosen to recognize their judgment in the U.S. – the only jurisdiction where Chevron Corporation is found. They have opted, instead, to initiate actions in Argentina, Brazil and Canada and target subsidiaries that have nothing to do with the proceedings in Ecuador.

    In the U.S., after a federal racketeering trial, which Chevron Corp. initiated against those that procured the fraudulent judgment in Ecuador, a federal court found the Ecuadorian judgment to be the product of “egregious fraud,” as well as bribery, coercion and political interference. The court detailed its extensive factual findings in a 500-page opinion. That opinion was unanimously upheld on appeal. Similarly, prosecutors in Argentina and Brazil have concluded the Ecuadorian judgment is fraudulent and urged courts in their respective countries to reject enforcement of the Ecuadorian judgment.

    Mr. Ha-Redeye also omits several essential historical facts. Chevron never operated in Ecuador. Texaco Petroleum Co., subsidiary of Texaco Inc., ceased operations in 1992, remediated its share of environmental impacts and was released by the Ecuadorian government years before Texaco was acquired by Chevron. Texaco’s former majority partner, state-owned Petroecuador, has been sole operator of the same fields for the past quarter century. Failing to remediate its share of impacts from its consortium with Texaco, Petroecuador has more than doubled the size of the operations, racking up an abysmal environmental record in the process.

    Far from being about “corporate social responsibility,” the enforcement action against Chevron Corp. is an attempt to extend proven Ecuadorian judicial fraud to Canada.

    For more information, visit http://www.chevron.com/ecuador

  2. Mr. Crinklaw,

    Thank you for providing a perspective from Chevron directly.

    In Chevron Corp. v. Donziger, the Plaintiffs did indeed attempt to seek relief in the U.S. Those efforts were described in slightly greater detail here.

    I appreciate your distinction that Chevron Corp itself never operated in Ecuador. The plaintiffs correctly allege that its subsidiary did, and their argument is that this distinction should not be recognized in law. What is clear is that some of the profits of Ecuadorian operations did make its way ultimately to the parent company. Your point about other corporate actors potentially evading responsibility only speaks to the need for some form of remedy. I’m not positionally entrenched as to what that specific remedy may be.

    The broader issues here certainly are about CSR. There is no proof of judicial fraud that has been recognized in Canada, and the Canadian jurisprudence in these proceedings actually provides those allegations no direct bearing or weight.

    Again, thank you for your contribution.

  3. I raise a point of terminology. There is (or should be) no question in the proceedings of anyone “piercing a corporate veil”. The veil is only “pierced” when a creditor of a corporation is able to recover its debt from the corporation’s shareholders. The second question stated by Hainey J. in his reasons is simply wholly misconceived; no one has any claim against Chevron Canada. The plaintiffs’ claim is that Chevron Canada is an asset of Chevron. Any judgment against a shareholder, whether corporate or not, might result in the seizure of the shares in the corporation owned by the shareholder. No veil is pierced if that happens.

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