In judgment enforcement cases, it may be possible to pierce the corporate veil: Dissent in Ont. C. A. Chevron ruling

            The Ontario Court of Appeal recently dismissed the Equadorian plaintiffs’ appeal in the Yaigauje v Chevron case.   To enforce their judgment against Chevron Corporation for environmental damage in Equador, the plaintiffs sought to pierce the corporate veil and enforce their judgment against the assets of Chevron Canada.   The majority firmly rejected the suggestion that if has power to do so on equitable grounds.  The plaintiffs sought to enforce the judgment here because a few years ago a U.S. court found the judgment was obtained by fraud, and barred enforcement in the United States.   

However, the minority held there exists a just and equitable ground for piercing the corporate veil, albeit a limited one, to enforce judgments including foreign judgments.  There is reason to believe the Supreme Court of Canada will hear this matter, and conceivably decide there is such a ground.

The majority in Chevron held that there is no independent just and equitable ground for piercing the corporate veil, not even for judgment enforcement cases.    The Court held that the restrictive approach in Transamerica Life Insurance v Canada Life (1996) 28 O.R. (3d) 423, affirmed [1997] O.J. No. 3754 governs.   Transamerica requires a finding that the corporation is “completely dominated and controlled and is being used as a shield for fraudulent or improper conduct”.  Further, Chevron held that the existence of a judgment makes no difference, even though the existence of a judgment means that liability has been determined.   To allow such an exception to corporate separateness for judgment enforcement cases would mean, the Court said, that the corporations against whom the judgment is enforced would “lose all of its protection as a natural person under the CBCA”. (para. 75). 

Hourigan J., writing for the majority, said two Supreme Court of Canada cases,  Sun Indalex v United Steelworkers [2013] 1 S.C.R. 271 and Commercial Bank Leasing v Canada  [1998] 2 S.C.R. 298, uphold corporate separateness.   However, in both cases, corporate separateness was only a peripheral issue -- in Sun Indalex the Court’s discussion of corporate separateness was less than three lines long.  Neither case discusses the question of an independent just and equitable ground, and it is not clear any party even argued for one.  

Justice Nordheimer, although concurring in the result, parted company with the majority. He held that “the court is prepared to recognize that there may be situations where equity would demand a departure from the strict application of the corporate separateness principle in the context of the enforceability of a valid judgment, whether foreign or domestic”.   He rejected the rigid approach espoused by the majority, and pointed to cases[i] subsequent to Transamerica where the Court of Appeal has pierced the corporate veil for equitable reasons.    The judge drew a distinction between “imposing liability on a party through the mechanism of lifting the corporate veil” and “the enforcement of a judgment debt”, i.e. where “liability has already been established”.  (para. 94)  He added that “the situations where such a remedy will be appropriate are likely to be rare and exceptional”.  (para.116).[ii]    He said this remedy may well be appropriate in this case, but for the U.S. courts’ finding that the Equadorian judgment was obtained by fraud, and the fact that Ontario courts have not yet been called on to make their own determination of the validity of the judgment.  

Hourigan J. was very dismissive of the notion of an independent just and equitable ground for piercing the corporate veil, describing it as “ill-defined” (para. 82), and “untethered to the jurisprudence, the statutory rights of corporations or any discernable principle” (para. 79).   He framed the issue as “whether this court is prepared to sacrifice certainty [the long-standing principle of corporate separateness] for the sake of expediency” (para. 72).   

Such an emphatic rejection of the just and equitable ground, despite the support for it in the case law,  indicates a significant change in corporate law, and a strong basis for appeal.    It is hoped that this very conservative ruling will be appealed to the Supreme Court of Canada. 

---

[i] Parkland Plumbing  & Heating v Minaki Lodge Resort 2009 ONCA 256 and Downtown Eatery v Ontario (2001), 54 O.R. (3d) 161

[ii] Maybe even “very rare” (the wording in a quote Nordheimer J.A. adopted from Lord Mance in the U.K. Supreme Court’s 2013 decision in Prest v Petrodel). [2013 UKSC 34, [2013] 2 A.C. 415.

Enforceability of Arbitration Clauses that are also Forum Selection Clauses

        In the recent case of Heller v Uber, [2018] O.J. No. 502, an Uber driver commenced a proposed class action for a declaration that Uber drivers are employees and are thus entitled to the protection of the Employment Standards Act.  The contract between Uber and its drivers stipulates that disputes are to be resolved by arbitration, specifically in Amsterdam, the Netherlands,  under the Rules of Arbitration of the International Chamber of Commerce. The clause in Heller was in effect a combination of an arbitration clause and a forum selection clause.   The Ontario Superior Court of Justice stayed the proceeding after finding the arbitration clause is valid.   Unfortunately, the Court did not look closely at the forum selection aspect. 

         First, some background about the case.  After determining that the applicable statute is the International Commercial Arbitration Act, 2017 (as opposed to the Arbitration Act, 1991), Perell J. analyzed in some detail whether Heller was bound by the arbitration clause.  The Court observed that “absent legislative language to the contrary, courts must enforce arbitration agreements”  (para. 64).*   He also noted that the question of whether the arbitrator has jurisdiction over the dispute is itself to be decided, at first instance, by the arbitrator.   The Court then considered whether any exceptions to referral to arbitration apply, chiefly whether such referral is null and void on the ground of unconscionability.  Finding no exceptions were applicable, the Court found the clause was enforceable.   

          But what about the forum selection part of the clause?   The Supreme Court of Canada in Z. I. Pompey  v ECU Line  (2003), 224 D.L.R. (4^th) 577 held that courts have discretion to not enforce  an otherwise valid forum selection clause if “strong cause” is shown.  Strong cause factors include inequality of bargaining power and the impact of the clause on the parties.  Unconscionability is just one of several factors.    There was no denying that Uber’s contract was not negotiable.   Having to go to the Netherlands -- where Uber’s legal team is based – could cause financial hardship for drivers; Mr. Heller earns $400 -  $600 per week based on 40 -50 hours of work per week.  The hardship would be greater still if, as is likely, the driver must pay for a local lawyer to go to the Netherlands. Mr. Heller cited Douez v Facebook [2017] S.C.J. No.23, in which the Supreme Court of Canada held a forum selection clause requiring disputes to be litigated in California was unenforceable in light of, among other things, the significant imbalance in bargaining power between Facebook and its users.  

           Perell J. distinguished Douez, saying Heller “is not about a discretionary court jurisdiction where there is a forum selection clause to stay proceedings” (para. 77).    However, the fact the arbitration clause is enforceable does not automatically mean the forum selection aspect is also enforceable.  The statutes and cases the court cited in support of its ruling in favour of the referral to arbitration do not say that the law regarding arbitration clauses prevails over the law regarding forum selection clauses.     Novatrax International v. Hagele Landtechnik (2016) 132 O.R. 3d) 481 involved a clause that said the parties are to settle any disputes by binding arbitration in Frankfurt, Germany. The defendants had moved, successfully, to stay the action in light of the aforementioned forum selection clause.  The Court of Appeal treated the clause as a forum selection clause and considered the “strong cause” analysis as set out in Pompey.  In fact, both sides agreed that the governing principles are those set out in Pompey (para. 5).  The Court of Appeal upheld the motion court’s stay.

          Unfortunately for Heller,  it does not appear that he argued that the Uber clause was a forum selection clause as well as an arbitration clause, and that the Pompey strong cause test applies.  This test gives the court broader discretion to refuse to enforce the forum aspect of the clause and have the arbitration done in Ontario.  Incidentally, Uber indicated during argument that the arbitration could be arranged in Ontario (footnote 39).   Doing so would likely be very helpful to Heller.   However, the Court did not consider having the case arbitrated in Ontario.    It simply ruled that “the action is stayed in favour of arbitration”.    There will likely be an appeal. Let’s see if the forum selection strong cause argument comes up then. 

*As well, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which has the force of law in Ontario pursuant to s. 2 of the ICAA, states at Article II, para. 3:  “The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.”

Place Where Harm Occurs, as Basis for Jurisdiction, is Limited: U.K. Supreme Court

            Sometimes, for strategic reasons, a foreign litigant prefers to sue in the Courts of the United Kingdom.    For example, Russian oligarchs have often done so, even when the connection between the U.K. and the dispute is tenuous.     A recent ruling of the U.K. Supreme Court narrows the British courts’ jurisdiction.  In AMT Futures Ltd. v. Marziller  [2017] UKSC 13, AMT chose the British courts for a claim against a lawyer, Marziller, who resides in Germany. AMT could sue Marziller in the U.K. only if the claim is for damage “sustained within [the U.K.]”  (CPR PD 6B r.3.1(9)).    This rule is based on the Brussels I Regulation (s 7(2)).  Such jurisdiction is an exception to the general rule that a defendant is to be sued in the defendant’s domicile.  

            

            The facts are these.  Marziller had sued AMT on behalf of AMT clients, in Germany. He did so despite the fact the client contracts contained a exclusive jurisdiction clause in favour of  the U.K. courts.     AMT challenged the jurisdiction of the German courts but lost, and paid over two million pounds to settle the case.     AMT then sued Marziller, arguing that Marziller had deprived AMT of the benefit of the exclusive jurisdiction clause by inducing AMT’s clients to breach their contract.   AMT argued that the harm occurred in the U.K. based on the fact AMT had paid the settlement out of an account in England and based on the exclusive jurisdiction clause in favour of the U.K. 

             

            AMT succeeded at the trial level, but the Court of Appeal and U.K. Supreme Court ruled that the claim could not be brought in the U.K.  The Supreme Court stated that promoting certainty is central to the Regulation.  A defendant ought to be able to predict where he might be sued.  Exceptions to the general rule that a defendant is to be sued in his domicile are to be restrictively interpreted.   There must be a close connection between the court and the action, for the sake of the sound administration of justice.    The rationale for the ‘damage sustained in the jurisdiction’ exception is that the courts of such jurisdiction are in a particularly good position to determine the evidence of actual damage.   However, on the facts here, where the inducement to breach occurred in Germany, such rationale would not apply.       Various rulings of the Court of Justice for the European Union have limited the scope of the ‘damage sustained in the jurisdiction’ exception to initial and direct damage to the immediate victim.  

             

            This wariness about damage sustained as a basis for jurisdiction is found also in Canada.   The Supreme Court of Canada expressly rejected ‘damage sustained’ as a presumptive connecting factor for tort cases in Club Resorts v Van Breda [2012] S.C.J. no. 17.   Its reason:  that an injury may occur in one jurisdiction and the injured person suffer the pain and inconvenience in a second, or a third.    “damage sustained”, as a presumptive connecting factor, would risk “sweeping into that jurisdiction claims that have only a limited relationship with the forum”  (para 89).    Similarly, the Court Jurisdiction and Proceedings Transfer Act,  in force in B.C.,  Saskatchewan and Nova Scotia, which deems several types of claims to have a real and substantial connection (e.g. claims relating to a tort occurring in the province, or claims relating to a contract to be performed in the province) does not include damage sustained in that list.