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The Second Opinion: Canadian Subsidiaries Beware? The Ontario Court of Appeal Addresses the Enforcement of Foreign Judgments Against Related Entities

Posted in The Second Opinion
Hovsep Afarian

The Ontario Court of Appeal’s decision Yaiguaje v. Chevron Corporation, 2013 ONCA 758, has important implications for both foreign corporations and their Canadian subsidiaries.  The decision clarifies the test by which Ontario courts will enforce foreign judgments, and allows enforcement actions to proceed in Ontario where the only hope of recovery is from the Canadian subsidiary of the foreign corporation.

The case stems from a long-running legal battle between Chevron US, one of the world’s largest companies, and the indigenous peoples of the Sucumbíos and Orellana provinces in Ecuador.  The Ecuadorians sued Chevron US in Ecuador in 2011, alleging that between 1972 and 1990, Texaco (which Chevron US acquired in 2001) engaged in commercial activities that caused significant environmental damage to the indigenous peoples’ lands, waterways, and way of life.  Chevron US was found liable for $18 billion, an amount later reduced on appeal to $9.1 billion.  Chevron refused to pay the award, contending that the judgment was obtained through fraud, bribery, and other illegal means.  Since Chevron US no longer has assets in Ecuador, and since US courts have been sympathetic to Chevron’s allegations of fraud against the Ecuadorian court, the Ecuadorians sought to have the judgment recognized and enforced in Ontario against Chevron Canada, a wholly-owned subsidiary of Chevron which had no involvement in the initial judgment.

The motion judge acknowledged that Ontario has jurisdiction to recognize and enforce the judgment, but exercised his discretion to stay the enforcement action as Chevron US has no assets in Canada, Chevron Canada is a separate legal entity from Chevron US, and there was therefore no practical reason to continue with the enforcement action.  It would be preferable, the motion judge found, for the Ecuadorians to pursue their enforcement action against Chevron in the US.

The Court of Appeal agreed that Ontario has jurisdiction over the enforcement action, but disagreed that the action should be stayed.  With respect to the first issue, the Court clarified that the test for enforcing foreign judgments remains the one articulated by the Supreme Court of Canada in Beals v. Saldanha, 2003 SCC 72.  To recognize and enforce a foreign judgment in Ontario, an Ontario court must be satisfied that the foreign court had a real and substantial connection to the initial claim.  Ontario courts are not required to also demonstrate that there is a real and substantial connection between Ontario and the legal dispute in the foreign country.  Jurisdictional ties to Ontario are only required when determining if the Ontario court should hear an action of first instance, not an enforcement action.

Having recognized the judgment against Chevron US, the Court of Appeal then assumed jurisdiction over Chevron Canada, which carries on business in Ontario.  This was necessary for the plaintiffs because Chevron US does not directly own any assets in Canada; the assets all belong to Chevron Canada.  Although jurisdiction over Chevron Canada was easily established by virtue of physical presence in Ontario, the Court of Appeal went further and found that Chevron Canada’s “economically significant relationship” with Chevron US was an additional reason to take jurisdiction over Chevron Canada.  It appears then, that the Court of Appeal’s decision to assume jurisdiction over Chevron Canada was partly based on piercing the corporate veil between the foreign judgment debtor and its Canadian subsidiary.

Having assumed jurisdiction over Chevron US and Chevron Canada, the Court held that that the parties should have a hearing on the merits to determine whether the foreign judgment should be enforced against Chevron Canada, and refused to stay the enforcement action under s. 106 of the Courts of Justice Act.  The Court noted that since both Chevron US and Chevron Canada wanted to contest jurisdiction, neither attorned to the jurisdiction of the Ontario court.  Having refused to attorn, they could not then raise a substantive defence and ask the court to stay the action.

The decision in Yaiguaje v. Chevron Corporation has several implications for Canadian and foreign corporations.  First, it clarifies that Ontario courts will assume jurisdiction over a foreign judgment if there is a real and substantial connection between the foreign country and the legal dispute, regardless of the strength of the connection between Ontario and the legal dispute.  Second, it suggests that Ontario courts may assume jurisdiction over a corporate entity that has ties to Ontario and an “economically significant relationship” with another corporate entity over which it has jurisdiction.  This aspect of the decision is of particular concern for Canadian subsidiaries of multi-national corporations involved in activities that can lead to significant liability, such as resource extraction in foreign countries.  Third, corporate defendants that are affiliates of foreign, judgment debtor corporations will now have to re-think the strategy of refusing challenging the jurisdiction of Ontario courts.  Depending on the nature of the dispute, it may be useful to forgo jurisdictional challenges and raise substantive defences at the outset to overcome enforcement attempts.

The decision in Yaiguaje is also reminiscent of the recent decision of the Ontario Superior Court of Justice in Choc v. Hudbay Minerals Inc., 2013 ONSC 1414, which signals a greater preparedness of Ontario courts to implicate related entities in wrongdoing abroad.

The McCarthy Tétrault Opinions Group consists of members of the firm’s litigation department whose practices focus on written advocacy and the provision of strategic advice and opinions in the context of complex business disputes and transactions. The members of the Opinions Group are Anthony Alexander, Martin Boodman, Brandon Kain, Hovsep Afarian and Kirsten Thompson.