In September 2017, both the Court of Appeal for Ontario and the Federal Court of Appeal (FCA) released decisions that affirm established principles about the separate legal personalities of corporations: Yaiguaje v. Chevron Corporation1 and Delizia Limited v. Nevsun Resources Ltd.2 Both decisions were made in the context of applications for the recognition and enforcement of foreign judgments or awards, and both signal that judgment creditors looking to enforce foreign judgments or awards must carefully consider whether they are seeking relief against the correct legal entity. The existence of the foreign judgment or award will not affect the high threshold for piercing the corporate veil.
The more well-known of these cases is likely Yaiguaje, given its long history and journey to Supreme Court of Canada on jurisdictional issues.3 In that case, the appellants held a judgment from an Ecuadorian court, which they sought to enforce in Ontario against Chevron and its indirect subsidiary, Chevron Canada. Earlier in 2017, the Superior Court of Justice (SCJ) granted the respondents’ motion for summary judgment and dismissed the appellant’s cross-motion to add a further defendant. The Court of Appeal for Ontario and Federal Court of Appeal decision released on September 21, 2017 concerned the respondents’ motion for security for costs in connection with the appeal of the SCJ decision. The Court of Appeal for Ontario and Federal Court of Appeal dealt with the issue of piercing the corporate veil in considering the merits of the appeal to determine whether to award security for costs (the Court of Appeal for Ontario and Federal Court of Appeal found that the applicants were not impecunious and therefore needed to demonstrate that they had a good chance of success on the merits). The appellants did not establish that they had a good chance of success on the merits as the corporate veil could not be pierced. The Court of Appeal for Ontario and Federal Court of Appeal ordered security for costs.
In Delizia, the appellants appealed an order of the Federal Court setting aside garnishment orders made against the respondents in two related proceedings. The garnishment orders related to debt owing by the State of Eritrea to Delizia pursuant to an arbitration award made by the Arbitration Institute of the Stockholm Chamber of Commerce. Delizia had obtained an order recognizing the award as a judgment. Delizia sought to enforce the recognition order against the respondents, who – through subsidiaries – engaged in mining activities in Eritrea. A prothonotary had allowed Delizia to enforce against the respondents and granted garnishment orders garnishing amounts owing by the respondents’ subsidiaries to Eritrea. The Federal Court overturned the garnishment orders, which decision was upheld by the FCA.
In addressing the merits of the appeal in the context of the motion for security for costs, the Court of Appeal for Ontario and Federal Court of Appeal relied on its decision in 642947 Ontario Ltd. v. Fleischer4 for the proposition that the corporate veil can only be pierced when a company is incorporated for an illegal, fraudulent or improper purpose, or if when incorporated, "those in control expressly direct a wrongful thing to be done” and on the decision in Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co.5 for the proposition courts will only “disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct."
The motion judge concluded that Chevron Canada was not completely dominated and controlled by Chevron, but rather that they exhibited a typical parent/subsidiary relationship. This was a finding of mixed fact and law and would therefore be difficult to overcome on appeal. Further, there was no allegation that the corporate structure was designed or used as an instrument of fraud or wrongdoing.
The appellants made the further argument “that corporate separateness should not be applied in situations where it will yield a result ‘too flagrantly opposed to justice’” (para. 49). This was met with little sympathy. The Court of Appeal for Ontario and Federal Court of Appeal cited a long list of cases that “rejected the notion that the corporate veil could be pierced based on what is ‘just and equitable’” without wrongdoing or conduct tantamount to fraud (para. 50). One of these cases was Nevsun Resources Ltd. v. Delizia Ltd.6, the lower court decision in the Delizia case.
The Court of Appeal for Ontario and Federal Court of Appeal also rejected the further submission that a “new approach” to piercing the corporate veil should be adopted in the context of applications for the recognition and enforcement of foreign judgments. The Court of Appeal for Ontario and Federal Court of Appeal found no support for the proposition that “an otherwise meritorious motion for security for costs should be denied because the action to which it relates concerns recognition and enforcement of a foreign judgment” (para. 57). A litigant seeking to enforce a foreign judgment should not be put in a more advantageous position than a domestic litigant.
Finally, the Court of Appeal for Ontario and Federal Court of Appeal observed that the purposes underlying security for costs orders also supported the conclusion that a party seeking to enforce a foreign judgment should not be treated differently than a domestic litigant. The objective of the security for costs rules is to protect respondents in connection with costs incurred and to be incurred. This is objective “is no less important when the main appeal concerns enforcement of a foreign judgment, particularly when the respondent is ‘exposed to the risk of being forced to go to a foreign jurisdiction to enforce an order for costs’” (para. 62).
Delizia also concerned efforts by the appellant to enforce a foreign award in Canada. In that case, the appellant sought to enforce the order recognizing the foreign award against the respondents, who – through subsidiaries – engaged in mining activities in Eritrea. The issue was whether a garnishment order could be made against the parent companies in Canada because those entities did not have direct relationships with the State of Eritrea. The respondent, Nevsun, for example, held 60 percent in Bisha Mining Share Company (BMSCo), which operated a mine in Eritrea. The other 40 percent was owned by Eritrean National Mining Corporation. The garnishments ordered against Nevsun were for “all debts owing and accruing from Nevsun or its subsidiary BMSCo to the State of Eritrea, including governmental bodies” (para. 7). This made Nevsun liable for amounts owing by its subsidiary, requiring piercing or lifting of the corporate veil.
As the Federal Court explained in Delizia, “any liability of Nevsun for debts owing or accruing by BMSCo to Eritrea, may only arise through operation of law and in this case, may only arise if Delizia is able to persuade the Court to pierce the corporate veil that exists between Nevsun and BMSCo as separate legal personalities” (para. 19). The Federal Court did not find any basis for doing so.
Like the Court of Appeal for Ontario and Federal Court of Appeal in Chevron, the Federal Court relied on Fleischer, which, as noted, recognized that separate legal personality can only be disregarded and the corporate veil can only be pierced where the corporation is completely dominated and controlled and being used as a shield for fraudulent or improper conduct.
The Federal Court also held that “mere injustice to one party is not sufficient, without more, to pierce the corporate veil” (para. 49). In any event, there would be no injustice in this case in declining to pierce the corporation veil: Nevsun set up BMSCo in Eritrea in 2006 – well before and completely unconnected with the dispute at hand. These “longstanding arrangements constituted legitimate business purposes” and there was “no evidence in this case of fraud, conduct akin to fraud or improper conduct on the part of Nevsun or its subsidiaries” (para. 52). There was no basis to pierce the corporate veil.
The FCA upheld the Federal Court’s finding that the structure of BMSCo was not put in place for Nevsun to avoid the garnishment in question and held that “once the prothonotary concluded that the corporate structure was not put in place to avoid the garnishment, this should have ended this part of the analysis” (para. 27). There was nothing to suggest that the incorporation of the relevant subsidiaries was done for the purpose of allowing Eritrea to evade the payment of its debt to Delizia. This was simply a common commercial arrangement to form a company to operate a mine and allow another person to share in the equity.
These appellate decisions emphasize the importance of established principles of separate corporate identity, including in the context of recognition and enforcement of foreign judgments or awards. Creditors should therefore give careful consideration to the entities against which they seek to enforce their foreign judgments or awards in Canada.