Chevron case is textbook Canadian corporate law
You might expect a legal fight over US$ 9.5 billion to involve several, complex legal arguments and a lot of bizarre plot twists.
But the most recent legal development in the case of Yaiguaje v. Chevron Corp. is, to my mind, notable for its simplicity.
In a written decision issued Friday, Judge Glenn Hainey of the Ontario Superior Court granted summary judgment dismissing the case against Chevron’s Canadian subsidiary, Chevron Canada. And he did so based on a bedrock principle of Canadian law called corporate separateness. The Chevron decision underscores how important this principle is — and not just for big corporations, but also small business people and entrepreneurs.
To recap, Yaiguaje v. Chevron is the case in which villagers won a multibillion- dollar pollution judgment from an Ecuador trial court. Yet the 2011 decision is controversial. A U. S. federal judge has even labelled the Ecua- dor lawsuit an “egregious fraud.”
Since Chevron has no assets in Ecuador, the villagers have been roaming the globe, looking for a jurisdiction that will allow them to commence enforcement proceedings. In 2012, the plaintiffs brought the case to Ontario in hopes of seizing Chevron assets in Canada.
Judge Hainey’s ruling doesn’t end the matter entirely. Although he dismissed the case against the oil company’s Canadian subsidiary, the Ontario action against the U. S. parent company continues. Yet since Chevron Canada is the Canadian entity that holds the assets the plaintiffs hoped to seize in the enforcement action, if the Ontario ruling isn’t a road block, it’s at least a speed bump.
The plaintiffs plan to fight on. They’ve publicly said they believe the ruling against Chevron Canada will be “swiftly reversed” on appeal.
They’re entitled to their optimism. But swiftly is a relative term, and if the outcome of every appeal was a foregone conclusion, there would be no need for appeals.
Under the principle of separateness, if a company owes money, it’s only that company that owes on the debt, and no one else. The implications are crucial for Canadian businesses. Creditors can’t collect on a corporation’s debt by going after the corporation’s shareholder owners. Creditors can’t chase after other companies located elsewhere in the parent company’s corporate family tree.
Chevron’s corporate organization chart s hows Chevron Canada to be seven steps removed from the U. S. corporate parent. Since it’s the parent company that owes the money in the Ecuador judgment, the plaintiffs have no case in Canada against Chevron’s indirectly held Canadian subsidiary, Judge Hainey concluded.
“The principle of corporate separateness provides that shareholders of a corporation are not liable for the obligations of the corporation,” the judge wrote. “It also provides that the assets of the corporation are owned exclusively by the corporation, not the shareholders of the corporation. As a result, Chevron does not have any legal or equitable interest in the assets of Chevron Canada as an indirect sharehold- er seven-times removed.”
Corporate law will always have detractors who will dismiss this as legal skulduggery. But the principle of corporate separateness doesn’t exist merely to protect massive corporations. It also enables entrepreneurs to launch startups without worrying whether a failure of the business will result in the loss of their homes. And it enables mom- andpop investors to buy shares in a company without the corporation’s creditors later knocking on their doors and asking them to cover the corporation’s debts.
That’s not to say that the plaintiffs’ Ontario case was something of a legal Hail Mary. Alan Lenczner, counsel for the plaintiffs, argued that Ontario’s Execution Act, which sets out the procedure under which someone can collect on a trial award in the province, is worded broadly enough to get around the c orporate s e parateness issue. The judge ultimately disagreed.
The plaintiffs had some successes in Friday’s ruling. In particular, they got the judge to toss out some of the defences parent company Chevron Corp. hoped to use in an eventual enforcement trial.
There is at least one important procedural matter yet to come. The judge has yet to decide whether the plaintiffs can add another of Chevron Corp.’s indirectly owned Canadian subsidiaries as a defendant, Chevron Capital Canada Co. The judge indicated in the Friday ruling that he would decide that question in a future decision.
Another procedural matter was decided on Friday, and this one was arguably a big win for Chevron. The judge rejected the plaintiffs’ request that he bar the oil company from arguing that the Ecuadorean trial judgment was the product of fraud. In a separate legal proceeding, a U.S. federal judge found that the Ecuador trial judgment was the product of fraud, bribery, forgery, intimidation and collusion. Those same allegations are bound to surface if and when the enforcement case makes it to trial in Ontario.