IHRP's SCC intervention profiled on cover of Nexus magazine: Spillover into Canada

Chevron Corporation says its Canadian subsidiary has no assets to pay Indigenous Ecuadorians a US$9.5 billion environmental settlement. What will the Supreme Court of Canada say?

By Christopher R. Graham, JD 2007 / Illustrations by Justin Renteria

From the Fall/Winter 2014 issue of Nexus.

On a cold December morning, the Rideau Canal slated gray with frost and nearly frozen, the Supreme Court of Canada heard arguments affecting 30,000 indigenous Ecuadorians and a multinational oil company headquartered in California. At issue was an Ontario court’s jurisdiction to enforce what might be the world’s largest environmental lawsuit—the judgment debt is US$9.5 billion—the underlying damages having occurred some 5,000 kilometres due south, where the temperature that same morning was a sultry 25 degrees Celsius.

The stakes were high for both parties but also, bizarrely, for Canadian corporate law.  What began as an excruciating jurisdictional puzzle now turns, at least potentially, on the corporate status of a Canadian subsidiary of the US multinational—that is to say, on the subsidiary’s Corporate Status (initial caps sic), its being, its purpose in the world, all the existential crises latent in its so-called corporate personhood. 

The case is Yaiguaje v. Chevron Corporation, which arose, literally, from beneath a portion of the Ecuadorian Amazon roughly the size of Rhode Island. Texaco Petroleum Company began drilling oil in the mid-1960s and by many accounts spent almost two decades smearing as many hydrocarbons over the landscape as it pumped out for profit. A class action lawsuit filed in the United States has been chasing remediation funds for more than 20 years—a judgment finally issued in 2012—in the midst of which Chevron Corporation (“Chevron”) acquired Texaco and with it responsibility for paying out the judgment.

With what will Chevron pay, though, is the question the Supreme Court will determine. On that cold December morning, Chevron—the world’s third largest oil company—argued that it had no assets in Ontario, in Canada, or, by inference, anywhere else on this oil-rich earth.

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How the Chevron case ended up in Canada is a story of Wagnerian scale and intensity.  (Chevron’s stated resolve, on the record: “We’re going to fight this until hell freezes over.  And then we’ll fight it out on the ice.”). The original class action suit was filed in New York State in 1993, on issues affecting some 30,000 Indigenous Ecuadorians. Ten years later, New York was ruled a non-convenient forum and the case moved to Ecuador.  The Ecuadorian proceedings lasted from 2003 to 2012, resulting in an order that Chevron pay roughly US$9.5-billion to remediate contaminated lands and provide healthcare to local residents. 

Meanwhile, Chevron launched a series of legal proceedings in the United States to challenge the enforceability therein of any Ecuadorian judgment. (Chevron is a Delaware corporation, its head office in California.) The end result of those proceedings—featuring reciprocal allegations of graft and corruption almost literally unbelievable—effectively blocked enforcement of the Ecuadorian judgment anywhere in the United States. 

With Chevron’s US assets legally unavailable and Chevron/Texaco’s Ecuadorian operations long since disbanded, the Ecuadorian plaintiffs went looking for Chevron assets in other jurisdictions. The nearest such jurisdiction turned out to be Canada, home to Chevron Canada Limited (“Chevron Canada”) and its operations in Alberta, Atlantic Canada and the Northwest Territories.

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Enter Alan Lenczner, LLB 1967, and Brendan Morrison, JD 2011, of the law firm Lenczner Slaght, Canadian counsel for the Ecuadorian plaintiffs. Lenczner and Morrison took the enforcement action—still at the stage of pre-trial motions—from Superior Court, to the Court of Appeal and finally the Supreme Court of Canada.

Lenczner, one of Ontario’s premier litigation counsel, was originally approached by the Ecuadorian plaintiffs (technically a trustee for the remediation judgment and its Ecuadorian counsel) to determine whether there was any hope of enforcing the Ecuadorian judgment in Canada. There are well-established defences to enforcement of a foreign judgment in Canada, the viability of which would mean “there was no point in trying to enforce in Canada,” says Lenczner. “So I went down there, and I reviewed the trial record, and to me, I think it was a really robust trial. Assuming a valid judgment, our opinion was that it would be possible to enforce in Canada.”

Morrison, who made his first Supreme Court appearance in the Chevron case, did much of the research supporting the enforceability opinion. (It’s worth an N.B. that the facts on which that opinion is based are largely irrelevant at these pre-trial proceedings, but you can preview the lurid details by reading Chevron Corp. v. Donziger, 974 F. Supp 2d 362 (SDNY 2014), the decision barring enforcement in the U.S.) “The law on this issue in Canada is fairly clear,” says Morrison. “The Court of Appeal determined that there is absolutely jurisdiction in the Ontario Superior Court to entertain the recognition and enforcement action.”

Chevron, of course, takes the opposite position, arguing that Ontario has no jurisdiction to entertain an enforcement action where neither Chevron nor the underlying action (i.e., the Ecuadorian proceedings) has any connection to Ontario. Chevron’s second argument, however, has received virtually all the press. (Chevron Canada’s counsel respectfully declined to weigh-in for this article, citing the matter being actively before the courts.)

That argument—successful at the Superior Court but not at the Court of Appeal and just terrificallyfraught—is that the Ontario court’s jurisdiction is irrelevant because Chevron has no assets in Ontario. The assets of Chevron Canada simply don’t belong to Chevron, notwithstanding Chevron owns 100 percent of Chevron Canada. (Technically 100 percent of a corporation that itself owns 100 percent of a corporation that itself owns… seven levels of that.) The assets of a subsidiary, even a wholly owned subsidiary, are not, at law, the assets of its parent. In the language of Chevron’s factum, “there is no basis in fact or law upon which to reverse pierce multiple corporate veils and treat Chevron Canada’s business and assets as those of Chevron Corp”.

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Chevron’s parent-subsidiary business model should not be unfamiliar, at least conceptually. The arrangement has proliferated in Western economies as the preferred structure for expanding operations, especially international operations. The key legal doctrines are corporate separateness (i.e., a corporation and its shareholder(s) are distinct legal entities) and limited liability (shareholders are not liable to the corporation’s creditors), the combined effect of which is basically thus: parents ‘own’ their subsidiaries for purposes of profit but not liability.  

So far as Western economies are concerned—Canada included—the pervasiveness of this arrangement is a compelling argument in its favour. Corporate parents and their subsidiaries are legally separate for a reason and, much more importantly,that’s what everybody thinks when doing business.  Indeed, Chevron makes precisely this argument:

The principle of corporate separateness plays an important part in a Western economy.  The limited liability offered by the doctrine of corporate separateness is an integral feature of the business landscape, facilitating entrepreneurship and the raising of capital to initiate or expand business operations.

One view of the Chevron case is that these conclusions are radically not applicable to business between Western economies (say, the United States) and economies in the Global South (say, Ecuador), and the Supreme Court’s decision is a good opportunity to think about what that means. The Faculty’s International Human Rights Program (“IHRP”) sought—and was granted—leave to intervene in the Supreme Court proceedings to advance just this view.

“We are asking the Court to recognize the globalized world we live in and break down the state-centric nature of the common law,” says Renu Mandhane, JD 2001, director of the IHRP. “We’re trying to situate this case in a broader legal movement.”

Over the last several years, the IHRP has developed a recognized expertise in the field of corporate accountability for human rights, the basic project of which is to recognize and deal with domestic industry as a responsible actor in foreign (often developing) countries. The field is especially relevant to Canadian law because so many Canadian firms are major players in extractive industries around the world. When the Supreme Court accepted the Chevron case, says Mandhane, it was clear that the IHRP could offer a unique and compelling perspective.

The thrust of the intervention (made jointly with Mining Watch and the Canadian Centre for International Justice) is that domestic law should strive to provide meaningful remedies for communities that are negatively affected by international business. The IHRP’s intervention argued that the rigid application of common law rules for jurisdiction and corporate separateness inappropriately frustrate access to justice and effective remedies.

“This case is really about fundamental justice,” says Mandhane. “How do courts ensure that someone, eventually, is held accountable?”

The intervention’s normative case is buttressed by substantial research into the underlying purpose of corporate separateness and limited liability. Students at the Faculty did much of this research, including Sarah Beamish, 3L. “There’s growing concern in our law that the corporate veil is problematic, and it’s not just amongst ‘do-good’ types,” says Beamish. “The rationale is protecting people as shareholders, but the situation for corporate parents who are sole shareholders of subsidiaries is entirely different.”

The justification for corporate separateness and limited liability is that the doctrines make it easy for strangers with money to fund the business of other strangers. (In more clunky prose: the doctrines facilitate specialization of capital and management, reduce monitoring costs of capital, and make irrelevant the wealth of individual shareholders.) The end result is substantial social gains in terms of economic activity and wealth generation. 

Whatever the economic advantages of corporate separateness and limited liability are, there are significant economic and social concerns as well: these doctrines imply that corporations can externalize risks neither managers nor shareholders will totally bear. A good example of this cost is tort victims—like the Ecuadorian plaintiffs—who have no say in whether the corporate defendant will have assets to pay an ultimate judgment. 

Cory Wanless, JD 2008, of the law firm Klippensteins, is co-counsel for the IHRP’s joint intervention and makes the point thusly: “There is a huge difference between how the legal world and real world view business. What the real world sees is one business.  What the legal world sees is dozens of entities, each one separate from the other.”

What the IHRP hopes to do with the intervention is force the Supreme Court to recognize, and perhaps begin to reconcile, these competing realities. Says Murray Klippenstein, LLB 1984, lead counsel on the intervention and a leading Ontario lawyer on issues of corporate accountability for human rights: “We’d like to see the court wrap its head around the idea that legal protection between parents and subsidiaries has no foundation in legal and economic theory–it’s a mirage.”

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Except, well, it’s complicated. Professor Ian Lee, LLB 1994, associate dean of the JD program, explains how the doctrine of corporate separateness serves a generic economic function by allowing contracting parties to structure their relationships: claims of the parent, for example, are structurally subordinated to creditors of the subsidiary, which facilitates even more refined specialization of capital and management. Seen in this light, allowing the Ecuadorian plaintiffs to enforce against Chevron Canada effectively allows the claims of Chevron to leapfrog the claims of Chevron Canada’s current creditors (which could include Chevron Canada’s employees).

“The argument is not that the Ecuadorian plaintiffs should lose,” says Lee, “but that we need to understand whose interests are being traded off.”

It goes without saying that these tradeoffs, whilst very real, are difficult to see and even more difficult to parse, perhaps the best illustration of which was the Canadian Bar Association’s thwarted attempt to file its own intervention in the Chevron case. In the fall of last year, the CBA announced it would intervene, triggering protests from members and law students over the process followed in deciding to intervene and the consequences that intervention would apparently endorse. The CBA went ahead and commissioned an intervention, then abruptly changed its mind: “[W]hile the factum was well-drafted and of a high standard of quality, it did not meet the specific requirements of CBA’s intervention policy.”

The CBA’s backpedalling also highlights, with exquisite awkwardness, how the Chevron case specifically, and transnational business generally, are deeply, emphatically political. While it remains unclear whether the Supreme Court will engage, or even acknowledge the politics in the Chevron case, it seems a virtual certainty that if the case does proceed, at some point the parties will be back to Ottawa for a final (final) resolution.