Yaiguaje v Chevron Corporation – The Court of Appeal confirms that there is no equitable ability to pierce the corporate veil
In Yaiguaje v Chevron Corporation (2018 ONCA 472), the Honourable Justice Hourigan, writing for the majority of the Court of Appeal, confirmed the traditional test for piercing the corporate veil. In so doing, Hourigan JA rejected that there was a principled exception to the principle of corporate separateness where it would cause a result “too flagrantly opposed to justice”. Instead, Hourigan JA favoured a strict test that ensured certainty and predictability when dealing with corporations.
Facts
The plaintiffs obtained a judgment in Ecuador in the amount of USD$9.5 billion against Chevron Corporation (“Chevron”). The plaintiffs initially attempted to enforce their judgment in the United States but enforcement of the judgment was denied on the grounds that it had been obtained by fraud.
The plaintiffs then looked to Canada to enforce their judgment, this time against Chevron Canada Limited (“Chevron”), a seventh level subsidiary of Chevron. Chevron and Chevron Canada brought a motion for summary judgment dismissing the plaintiffs’ claim against Chevron Canada on the grounds that its shares and assets are not exigible to satisfy the judgment against Chevron.
Decision of Hainey J
The motion was heard by the Honourable Justice Hainey. The plaintiffs raised two arguments in opposition to the motion. First, that Chevron Canada is an asset of Chevron that is exigible and available for execution pursuant to the Execution Act. Second, the plaintiffs argued that the Court should pierce Chevron Canada’s corporate veil.
On the issue of piercing the corporate veil, Hainey J held that the plaintiffs failed to prove that Chevron Canada was “completely dominated and controlled and being used as a shield for fraudulent or improper conduct”. In fact, the plaintiffs had not alleged that the corporate structure of which Chevron Canada is a part was designed or used as an instrument of fraud of wrongdoing and could not establish “total and effective control” on the motion. Finally, Hainey J rejected that the court could pierce the corporate veil where failure to do so would cause a result “too flagrantly opposed to justice”.
Hourigan JA’s reasons on piercing the corporate veil
Before the Court of Appeal, the plaintiffs’ main submission on piercing the corporate veil was that courts had the ability to do so when the interests of justice demand it.
Hourigan JA, writing for the majority, endorsed Transamerica Life Insurance Co. of Canada v Canada Life Insurance Co., which stated that there were only three circumstances where the court will pierce the corporate veil:
(1) when the court is construing a statute, contract or other document;
(2) when the court is satisfied that a company is a “mere facade” concealing the true facts; and,
(3) when it can be established that the company is an authorized agent of its controllers or its members, corporate or human.
In a case where it is alleged that a subsidiary corporation is a “mere facade” that protects its parent corporation, Hourigan JA held that a court must be satisfied that: (1) there is complete control of the subsidiary, such that the subsidiary is the “mere puppet” of the parent corporation; and, (2) the subsidiary was incorporated for a fraudulent or improper purpose or used by the parent as a shell for improper conduct.
Hourigan JA held that the courts should be “rigorous” in their application of the Transamerica test. Hourigan JA then categorically rejected the arguments advanced by the plaintiffs in favour of what he called an “ill-defined” and “unnecessary” exception to the principle of corporate separateness.
Nordheimer JA’s concurring reasons
The Honourable Justice Nordheimer wrote concurring reasons as he disagreed with the majority’s analysis regarding piercing the corporate veil.
Nordheimer JA took issue with the principle that it would never be appropriate to pierce the corporate veil to permit the enforcement of a judgment unless the requirements of the Transamerica test are met. Nordheimer JA distinguished Transamerica on the grounds that it did not involve the enforcement of a judgment but rather the imposition of liability on a party by piercing the corporate veil.
Nordheimer JA stated that courts have an inherent equitable power to pierce the corporate veil in circumstances where liability has been established but the judgment creditor is nevertheless left without any remedy because of the judgment debtor’s internal corporate structure.
Despite differing with the majority’s analysis, Nordheimer JA stated that he would have also dismissed the appeal based on the finding in the US proceedings that the plaintiffs’ judgment had been obtained by fraud. Given that finding, Nordheimer JA held that the circumstances do not rise to the level where the result is “too flagrantly opposed to justice”.
Takeaways
Business people can sleep a little easier in light of the Yaiguaje decision. The majority of the Court of Appeal sent a strong message that the corporate separateness of related companies should not be lightly interfered with. The majority also clearly defined the test that plaintiffs and creditors must meet to successfully pierce the corporate veil.
Had the plaintiffs’ argument been accepted, the Court of Appeal would have created a new “just and equitable” exception to corporate separateness that could create headaches for businesses and their lawyers. Had such an exception been endorsed, corporations would always be susceptible to having their veils pierced due to unforeseeable circumstances where it would be “unjust” for the principle of corporate separateness to apply.
Nordheimer JA’s reasons likely leave the door open to the Supreme Court of Canada to grant leave in the event that the plaintiffs seek to appeal the Court of Appeal’s decision. However, in the meantime, it is unlikely that trial and motion judges will adopt Nordheimer JA’s reasons in light of the majority’s clear endorsement of the Transamerica test without exception.