Principled Limitations on Access to Justice: The Final Installment of the Canadian Chapter of the Chevron Saga

Few cases have gained more international notoriety than the globalized proceedings of a group of residents in the Oriente region of the Republic of Ecuador against Chevron Corporation, a sprawling energy conglomerate based in California:

  • undoubted environmental devastation from a project in Ecuador developed by an indirect subsidiary of Texaco Inc, between 1964 and 1992, the latter being subsequently acquired by Chevron;
  • class action litigation against Texaco in the United States defeated on jurisdictional grounds on Texaco’s undertaking to attorn to a competent Ecuador Court;
  • prolonged litigation in Ecuador resulting in a $9.5 billion USD judgment against Chevron;
  • alleged fraud before and by the Ecuador court successfully pleaded to block enforcement in the United States, which judgment was affirmed on appeal;
  • resort by the plaintiffs to enforce in Canada through the Ontario courts, jurisdiction for which enforcement action was ultimately upheld by the Supreme Court of Canada;
  • but the plaintiffs’ action to enforce against Chevron through its wholly owned subsidiary, Chevron Canada, was defeated on an agreed motion for summary judgment, the motions judge found that the shares of Chevron Canada were not exigible to satisfy Chevron’s debt either pursuant to statute, the Execution Act, or through piercing the corporate veil.

In reasons released on 23 May 2018 (2018 ONCA 472), a three-judge panel of the Ontario Court of Appeal upheld the motion judge’s decision, unanimous in the result, but with a separate concurring opinion leaving open the possibility of an appeal to the Supreme Court of Canada based on the avenue of piercing the corporate veil on equitable grounds. This decision is significant, not only because it may have brought the Chevron saga to an end, but what it may say for veil-piercing doctrine going forward, certainly in Canada, and possibly in other common law jurisdictions around the world.

The majority decision of the Court of Appeal written by Justice Hourigan (Huscroft J.A., concurring) made short work of any statutory entitlement to attach shares of Chevron Canada for the parent company’s debt. The majority affirmed the motions judge, Hainey J., who interpreted the Execution Act as a purely procedural statute that “does not create any rights in a property but merely provides for the seizure and sale of property in which a judgment-debtor already has a right or interest.” And here the plaintiffs had no right or interest in the shares of Chevron Canada per se. In this the Court was unanimous, but the separate opinion of Justice Nordheimer parted company with the majority’s rigorous adherence to the principle of corporate separateness originating with the House of Lords decision in Salomon v. Salomon & Co. (1897) and Ontario’s test for piercing the corporate veil established in Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1997).

The appeal by the plaintiffs on enforcement through the assets of Chevron’s Canadian subsidiary was premised on principles of access to justice, which the U.S. Federal Courts had precluded on the basis that the Ecuador judgment had been obtained by fraud.

However, Hourigan J.A. rejected the existence of “an independent just and equitable” ground for veil-piercing outside the three situations outlined in the Transamerica test:

    • in construing a statute, contract or other documents;

when the court is satisfied that a company is a “mere facade” concealing the true facts; and

  • when it can be established that the company is an authorized agent of its controllers or its members, corporate or human.

In turn, the existence of a mere facade can only be made out when the court is convinced:

  • that there is complete control of the subsidiary such that the subsidiary is no more than a “mere puppet” of the parent; and
  • that the subsidiary was incorporated for a fraudulent or improper purpose or used by the parent as a shell for improper activity.

In this regard, plaintiffs’ counsel conceded that Chevron Canada did not meet the Transamerica test and the majority ruled that legal certainty militated against an open-ended exception to the rule based on just and equitable grounds: “Once the Transamerica test is jettisoned and no principled basis for piercing the corporate veil replaces it, we are left with a pure ad hoc test.” The exhortation to “do the right thing” was further complicated by the majority’s observations that “the equities of this case are far from clear,” given the U.S. court findings that the Ecuadorian judgment had been obtained through a “massive fraud”.

Justice Nordheimer did not dispute the taint around the Ecuador judgment, but did not agree “that it would never be appropriate to lift the corporate veil to permit the enforcement of a judgment, unless the requirements of the Transamerica test are met.” In support of his dissent on principle, if not in the result, Nordheimer J. draws sustenance from the reasons of Madam Justice Wilson in a 1987 decision, Kosmopoulos v. Constitution Insurance, citing academic authority for the proposition that the principle of “separate entities” should not be enforced where the result is “too flagrantly opposed to justice, convenience or the interests of the Revenue” concluding: “I have no doubt that theoretically the veil could be lifted in this case to do justice…” The majority did not view Kosmopoulos as a bypass to the  “consistent principle” articulated in Transamerica, but  Justice Nordheimer saw the “interests of justice” as a strong enough independent principle to depart from an otherwise consistent approach to the majority of cases. Justice Nordheimer also saw meaningful distinctions between the approach to veil piercing in determining liability as distinguished from enforcement, noting that there would be no hardship to innocent shareholders, given that Chevron owned 100% of Chevron Canada, should the interests of justice commend enforcement.

The most provocative element of this decision taken as a whole is a face-off between two principled arguments. For the majority, the interests of legal certainty prevailed. Against this principle Justice Nordheimer invokes “[t]he origins of equity [which] flow from the need to ameliorate the harshness of positive law in principled circumstances.” Both decisions display a mastery of precedent in supporting their ultimately quite different views of what principled approach should apply. However, that level of detail is the material for an article going well beyond the scope of this comment.

In the end, Justice Nordheimer joins the majority in the result based on the principle of comity in relation to the underlying foreign judgments, decisively in this case with respect to the U.S. Federal District and Circuit Court decisions respectively determining and upholding a finding of fraud undermining the Ecuador judgment. “Because of the manner in which this matter has proceeded, our courts have not been called upon to make their own determination of the validity of the Ecuadorian judgment,” Justice Nordheimer reluctantly observes: “Absent such a finding, even on my approach to the judgment enforceability question, the circumstances here cannot rise to the level that would be necessary to conclude that the result is ‘too flagrantly opposed to justice’ to permit the corporate veil to be pierced.”

There is no doubt that the Nordheimer dissent on issues of controlling principle in the common law raises ambiguities worthy of further judicial thought and inquiry. It is worthy of note that fraud is one of a few established “impeachment defences” along with natural justice, order and fairness and public policy, upon which, based on established Supreme Court of Canada authority in Morguard v. De Savoye (1990) and Beals v. Saldanha (2003), Canadian courts can conduct an independent inquiry on whether to enforce without deference to the originating court as a matter of “full faith and credit” in the domestic context or as a matter of “comity” internationally. In light of what has already been litigated in the Chevron saga, it would be a difficult and complex undertaking to put a Canadian court in a legitimate position to second guess the U.S. courts with respect to the originating judgment in Ecuador. However, those issues, like the initial question of whether an Ontario court had enforcement jurisdiction at all with respect to the foreign judgment debtor’s subsidiary, which earlier found its way to the Supreme Court of Canada, may once again reach our highest court for remand to courts below. In that event, portions of the already substantial Canadian chapter of the Chevron saga remain to be written.

H. Scott Fairley

Scott Fairley is a senior lawyer, advocate and counsel in the field of recognition and enforcement of foreign judgments and arbitral awards and has spoken and published widely on these subjects, both in Canada and abroad.