Canadian Underwriter

Energy firm’s environmental liability case reaches Supreme Court of Canada

December 23, 2014   by Canadian Underwriter

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A case before the Supreme Court of Canada, involving a US$9.5 billion judgment in a pollution lawsuit outside of Canada, has been “closely watched” because of a “large potential liability” faced by petroleum firm Chevron over alleged environmental damage in Ecuador and potential “significant impacts” on Canadian firms with affiliates operating outside of Canada, lawyers for Bennett Jones LLP suggest.

From 1964 through 1992, Texaco Inc., a Texaco subsidiary and partners were extracting oil in the Lago Agrio region of the Ecuadorian Amazon, wrote Mr. Justice David M. Brown, of the Ontario Superior Court of Justice, in background information provided with a ruling in 2013.

Justice Brown had ruled partly in favour of Chevron in staying an action, brought by 47 plaintiffs  from Ecuador, against Chevron Canada Ltd. Those plaintiffs – who represent about 30,000 residents of Ecuador – had sued Chevron Corp., which acquired Texaco in 2000, in Ecuador.

The plaintiffs asked the Ontario court “for judgment of the Canadian equivalent of US$18.256 billion” resulting from an award from a court in Ecuador. That was before an Ecuadorian appeal court, in November 2013, nullified US$8.6 billion in punitive damages against Chevron Corp., of San Ramon, Calif.

The plaintiffs also asked for a “declaration that the shares of Chevron Canada Limited and Chevron Finance Canada Limited ‘are exigible'” to that judgment and for an “appointment of an equitable Receiver over the shares and assets of Chevron Canada Limited and of Chevron Canada Finance Limited.” They later dropped their action against Chevron Canada Finance.

The Court of Appeal for Ontario, in December 2013, overruled the lower court. In a unanimous decision, the appeal court set aside the Ontario Superior Court of Justice’s stay of action against Chevron Canada, ordering Chevron and its Canadian subsidiary to file statements of defence within 30 days.

Last January, Chevron filed for leave to appeal to the Supreme Court of Canada, which heard the case Dec. 11.

The Court of Appeal for Ontario ruling “appeared to reinforce a willingness by Ontario courts to assume jurisdiction over matters not clearly linked to Ontario,” wrote Alison J. Gray, Justin R. Lambert and David J. Wahl, lawyers for Bennett Jones LLP, on the law firm’s corporate blog site.

“The case has been closely watched because of its fascinating facts, the large potential liability faced by Chevron, and because of allegations that the Ecuadorian judgment was fraudulently obtained (which allegations have been playing out in related New York litigation),” wrote Gray, Lambert and Wahl. “However, of most interest to Canadian corporations will be the potentially significant impacts on Canadian companies carrying on business abroad through foreign affiliates.”

In 2003, Ecuador Chevron was sued in a court in Ecuador by plaintiffs alleging “damage to the environment from the oil exploration and production operations,” Chevron stated in a filing earlier this year with the United States Securities and Exchange Commission. In 2011, an Ecuadorian court assessed a total more than US$18 billion in damages against Chevron. Later that year, a New York court granted Chevron a “global anti-enforcement injunction” against the judgment in Ecuador but that injunction was reversed on appeal.

Then in May, 2012, the Ecuadorian plaintiffs made their filing in Ontario. In that case, Chevron argued that Chevron Canada “had never been a party to the Ecuadorian proceedings and, accordingly, Chevron Canada was not a judgment debtor of the plaintiffs.” It did not file a statement of defence but brought a motion under Ontario law “solely to object to the jurisdiction” of the Ontario court, “without consenting or attorning to such jurisdiction” Chevron stated in a filing  with the Supreme Court of Canada.

In his decision released May 1, 2013, Justice Brown disagreed with Chevron when he concluded that he “has jurisdiction to determine whether the judgment of the Ecuadorian court should be recognized and enforced in Ontario.” However, he stayed the proceeding, citing Section 106 of Ontario’s Courts of Justice Act, which gives a court the power, “on its own initiative”, to stay a proceeding.

His decision was based in part on the contention that Chevron Corp. does not own assets in Ontario, never did own assets in Ontario and has no intention of owning assets in Ontario.

Chevron Canada, which is based in Calgary, does have an office in Mississauga, and sells lubricant and chemical products in Ontario, Justice Brown noted. But in an affidavit, employees of Chevron and Chevron Canada stated that Chevron Corp. does not own the shares of Chevron Canada, which is a seventh-level indirect subsidiary of Chevron.

The plaintiffs are alleging that Chevron Corp. “exercises effective control over the operations of Chevron Canada” but Chevron Canada contends it is “not domiciled” in Ontario and “conducts no activities in Ontario that have any connection” to the lawsuit alleging environmental damage on the part of Texaco and its partners.

“The jurisdiction in which the judgment debtor owns assets is only a short distance from this courthouse,” Justice Brown wrote in 2013, referring to the distance between Toronto and the U.S. border. “The plaintiffs have not sought the recognition and enforcement of their foreign judgment in the place of their judgment debtor’s residence or place of business and, instead, have come to Ontario arguing that the assets nominally held by a stranger to the foreign Judgment should be made available to satisfy it.”

The Court of Appeal for Ontario disagreed.

“There is a serious problem with this analysis, namely, the motion judge regards the following as obvious: the location of Chevron’s head office (San Ramon, California), Chevron’s place of business (various locations in the United States), and the lack of any connection between Chevron and Chevron Canada, thus rendering the latter ‘a stranger to the foreign Judgment,'” wrote Mr. Justice James C. MacPherson, on behalf of Ontario’s appeal court.  “In my view, these issues are at the heart of the conflict between the parties; they cannot be decided by easy resort to a potential action in New York.” The other two judges hearing the appeal concurred.

“Chevron and Chevron Canada can decide not to attorn to the jurisdiction of the Ontario courts, and let the recognition and enforcement process take its course,” Justice MacPherson wrote. “Or they can attorn to the jurisdiction of the Ontario courts and mount relevant challenges to recognition and enforcement.”

The Supreme Court of Canada’s decision “may require that Canadian corporations change their foreign corporate structures,” wrote Gray, Lambert and Wahl of Bennett Jones.