The Art of the Case: A Tale of Two Equities

Even with a bedrock of legal principle at stake, Ecuadorean villagers’ battle with Chevron had equities at its heart

“I looked at the stuff and said yes.”

That is Alan Lenczner’s succinct summary of the advice he gave to a group of Ecuadorean plaintiffs who consulted his firm, Lenczner Slaght Royce Griffin Smith LLP, about whether there was any chance of enforcing their US$9.5 billion Ecuadorean judgment against Chevron Corporation by seizing the shares and assets of its seventh-level subsidiary, Chevron Canada Limited.

Never mind that success in Yaiguaje v. Chevron Corporation depended on piercing the iconic “corporate veil” and undermining the principle of corporate separateness, a mainstay of the common law since 1896; never mind that there was no suggestion that the corporate structure to which the Canadian company belonged was an instrument of fraud or wrongdoing — one of the few circumstances in which courts have been willing to ignore the corporate veil; never mind that Chevron Canada had done absolutely nothing wrong and was not involved in the events that gave rise to the Ecuadorean judgment; and never mind that Chevron Corporation, a public company with its head office in California, had no separate presence or business in Canada.

Instead, what Lenczner discerned was a corporate “structure” in name only.

“Chevron Corporation and every one of the intervening subsidiaries had no business at all other than to hold the shares of the subsidiary below,” he said. “What I saw was a bigger picture of multinationals in the extraction business who set up these layers of subsidiaries and benefit from them while at the same time insulating the parent and the subsidiaries from each other’s liabilities.”

The circumstances, Lenczner concluded, were unique.

“It’s one thing to uphold the corporate veil where a parent has a partial interest in a subsidiary,” he said. “But there is in a sense no law on how you approach the separateness of a seventh-level subsidiary in the context of the facts in this case.”

The equities, the lawyer concluded, were there for his clients. And, as the Ontario Court of Appeal observed in its conclusive 2018 judgment, he was right.

“This is a tragic case,” the court wrote. “There can be no denying that, through no fault of their own, the appellants have suffered lasting damages to their lands, their health, and their way of life. Their frustration in obtaining justice is understandable.”

Unfortunately for Lenczner and his clients, what was “understandable” did not turn out to be determinative.

“Notwithstanding those legitimate concerns, our courts must decide cases in a manner that is consistent with the common law as developed in our jurisprudence and the statutes enacted by our democratically elected legislature,” the court added. “The legal arguments advanced by the [plaintiffs] can-not succeed.”

When Lenczner launched Yaiguaje in Ontario Superior Court in 2012, the procedural history was already some two decades old. But its origins went much further back, stemming from allegations that Texaco Inc., a part of the Chevron conglomerate since 2001, polluted rainforests and rivers in Ecuador and Peru between 1964 and 1992, resulting in damage to the environment and the health of regional residents.

Class actions launched in the US Federal Court in 1993 trolled on for a decade, but went nowhere when the court decided in 2002 that Ecuador was the more appropriate venue for litigating the claims. Key to the dismissal was Texaco’s agreement that Ecuadorian courts would have jurisdiction.

But it took until February 2011 before an Ecuadorean trial court, after an eight-year trial, awarded the plaintiffs an $18-billion judgment against Chevron Corp. That same month, however, an arbitration panel of the Permanent Court of Arbitration in The Hague, constituted to adjudicate Chevron’s claim that Ecuador had violated its bilateral investment treaty with the US by denying justice to Chevron and violating the company’s procedural rights, issued an interim order directing suspension of the domestic judgment’s enforcement. To no avail: as Chevron had no assets to seize in Ecuador, the Ecuadoreans sought to enforce the judgment in the U.S., but the efforts stalled in tangled legal proceedings.

Meanwhile, in March 2012, an Ecuadorian intermediate appellate court upheld the domestic award. It took Lenczner and his team — which over time included colleagues Brendan Morrison; Kirk Baert, Celeste Poltak and Garth Myers of Koskie Minsky LLP in Toronto; and Vancouver-based aboriginal rights lawyer Peter Grant of Grant Huberman — just 90 days after that decision to launch the Ontario action. The Ecuadoreans followed up with similar lawsuits in Brazil and Argentina.

The upshot for the defence teams involved on behalf of the Chevron entities was that their retainers engaged not only a moving target, but also one that had been moving for quite some time before they got involved. Apart from continuing proceedings in the US, Brazil, Argentina and the international arbitration panel, appeals were still outstanding in Ecuador.

“This was no ordinary case at any turn,” said Suzy Kauffman of Goodmans LLP in Toronto, who with colleagues Benjamin Zarnett (since appointed to the Ontario Court of Appeal) and Peter Kolla represented Chevron Canada Limited. “Something was always happening somewhere.”

The nature of the case, of course, mandated separate counsel for each of the Chevron entities.

“Although we worked cooperatively throughout with counsel for Chevron Corporation for the purpose of defending the case, we were always very mindful that we represented Chevron Canada, a separate legal entity,” Kauffman says.

Acting for Chevron Corporation were Larry Lowenstein and Laura Fric in Osler, Hoskin & Harcourt LLP’s Toronto office, and co-counsel Clarke Hunter in Norton Rose Fulbright Canada LLP’s Calgary office, along with his Toronto colleague Robert Frank.

“We all had to be sensitive to ensure that egos didn’t get in the way of consistency,” Lowenstein said. “This litigation was going on in other places, and Chevron Corp was putting forward a consistent stance.

Terrence O’Sullivan and Paul Michell, of Toronto’s Lax O’Sullivan Lisus Gottlieb LLP, acted for Chevron Canada Capital Company, the immediate parent company of Chevron Canada.

In choosing counsel, the defendants’ management and in-house teams focused on collaborative skills and independent-mindedness.

“People parked their egos, which made the whole thing an exemplary collaborative experience,” O’Sullivan says. “For example, each firm contributed whatever research they had done for earlier cases with similar issues.”

Which didn’t mean that agreeing to disagree was out of the question.

“Chevron welcomed debates and clashes among their external lawyers to help them chart their own course,” Lowenstein said.

It didn’t hurt that the attorneys from Gibson, Dunn & Crutcher LLP, Chevron’s lead lawyers in the US, were team players too.“

“Remember that litigation is a blood sport in the US,” Sullivan says. “But the Gibson Dunn people were very good at picking up on our legal and cultural values, and they were patient with us, expressed confidence in us and listened to us.”

Confidence, to be sure, was not lacking in the defence team.

“We felt very strongly that there was no legal basis for the case, especially insofar as it affected Chevron Canada, given that the company had no connection whatsoever to the Ecuador judgment, was an innocent party, and that a ruling against us on the corporate veil would have enormous implications,” Kauffman said

In this case, however, the confidence didn’t lead to that great spoiler, overconfidence.

“Although our case was based on bedrock principles of corporate separateness, we also wanted to assure the court that the equities of the case favoured Chevron,” O’Sullivan said.

As it turned out, things started out well enough for Chevron.

In May 2013, Justice David Brown of the Ontario Superior Court (since appointed to the Court of Appeal) ruled that Ontario courts had jurisdiction to recognize the Ecuadorean judgment and enforce the action. But he also ordered a stay, noting that there was no legal basis for piercing the corporate veil and leaving “nothing in Ontario to fight over”.

“Brown’s exercise of discretion to order a stay could have saved the parties millions of dollars, because we wouldn’t have had to go through all that followed just to achieve the same result,” O’Sullivan said.

Six months later, things continued to go in the right direction, if not perfectly satisfactorily, when the Ecuador National Court of Justice halved the damages to $9.5 billion.

Too much of a good thing, perhaps defying the law of averages, which may have caught up to Chevron in December when the Court of Appeal agreed with Brown on jurisdiction but lifted the stay.

“No question that, despite our steadfastness on the ultimate result, things didn’t always go smoothly from a jurisdictional perspective,” Kauffman says. “The path to the end was longer than we might have hoped.

”But the next year was a good one. Chevron sought and obtained leave to appeal to the Supreme Court of Canada in April 2014, just weeks after Judge Lewis Kaplan of the US Federal Court ruled that the Ecuadorean judgment could not be enforced because it was “obtained by corrupt means”, the product of fraud on the part of the plaintiffs’ lawyers who, the court found, fabricated evidence, resorted to bribery and ghost-wrote court documents and judgments.

“Kaplan’s decision was seminal, because it was foundational to our argument that a decision procured through fraud and bribery should not be recognized in Canada,” O’Sullivan said.

The findings of fraud and corruption on the part of the plaintiffs’ legal team and the Ecuadorean government also went a long way to balancing the equities. And although arguing the equities was decidedly secondary to the defendants’ strategy of focusing on “bedrock” legal principles, it both buoyed Chevron’s legal team and gave the emotional tenor of the case a little more balance.

Hunter saw the judgment as “vindicating and satisfying,” and Lowenstein believed the decision “certainly made Lenczner’s appeal to the sympathies of the court more difficult.”

Ultimately, however, it made no difference in the Supreme Court. In September 2015, the court dismissed Chevron’s appeal and confirmed the jurisdiction of the Ontario courts.

Although disappointed, Chevron’s lawyers took heart from their perception that the SCC had vindicated their strategy. Throughout, Lenczner had infused his “corporate veil” arguments with references to the “justice” of the Ecuadorean cause.

“Our biggest challenge throughout was to counter the plaintiffs’ false environmental allegations, which had nothing to do with corporate separateness, without distracting from our primary argument regarding the corporate veil,” Lowenstein says.

As it turned out, the SCC wasn’t in the least bit distracted. Although both sides agreed that the record before the SCC was enough to make findings on the substantive issue, the court specifically refused to do so.

“The SCC’s reasons made absolutely no finding on the merits and left it open for us to pursue summary judgment, which is what we did,” Kauffman said. “So we directed our efforts to demonstrating that Chevron Canada was a separate legal entity that had committed no impropriety that would provide a basis to seize its assets.”

Lenczner and his team, who had left no stone unturned in attempting to demonstrate that Chevron Canada was ultimately bound by certain of Chevron Corporation’s policies, sought and obtained further document production before the summary judgment hearing.

“In response, the Goodmans team went about demonstrating that Chevron Canada was truly a corporate entity in its own right, and the Chevron Corporation team took on the task of showing that the policies were part of a decentralized management system and implemented in a way that allowed Chevron Canada to make its own decisions,” Hunter says. “The idea was not to underestimate the Ecuadoreans’ argument, and to put forward all the reasons why corporate separateness was not only a principle of law, but a reality on the facts of this case.”

Justice Glenn Hainey of the Ontario Superior Court heard summary judgment motions from both sides. In January 2017, he allowed Chevron’s motion and dismissed the plaintiffs’ claim against Chevron Canada.

Lenczner appealed, and a hearing date was eventually set for April 2018.

Before the hearing, things turned ugly for the Ecuadoreans — in spades.

In June 2017, the Supreme Court of the United States refused to hear an appeal from a 2016 federal court of appeal decision upholding Kaplan’s ruling. Several months later, Argentinian and Brazilian courts separately held that the Ecuadorean judgment could not be enforced in their countries.

Undaunted, Lenczner refocused.

“Before the hearing of the appeal, the plaintiffs added Peter Grant, who had an aboriginal practice, to their team and shifted the angle of argument to make it more about indigenous people and their rights.” Kauffman noted.

The Court of Appeal heard the appeal in April 2018 and released its decision upholding Hainey’s judgment in May. The decision was unanimous, although Justice Ian Nordheimer, in a separate concurring judgment, would have refused to recognize the corporate veil when the result was “too flagrantly opposed to justice” — something, however, that had not been established here.

Several months later, the Argentine Appeals Court upheld the decision rejecting the Ecuadorean’s attempt to enforce their judgment in Argentina, citing a lack of jurisdiction and connection to Argentina. By that time the Ecuadoreans had decided not to take the Brazilian case any further.

But the most telling blow came from the international arbitral tribunal, which, in a scathing September 2018 decision, ruled that the judgment against Chevron’s predecessor, Texaco, “violated international public law policy” because it had been obtained through fraud, bribery and corruption and “should not be recognized or enforced by the courts of other States.” For the first time, the notion that Chevron was not at fault for the Ecuadoreans’ plight, had been validated in an adjudicated proceeding.

“The BIT award was even more vindicating than Kaplan’s judgment because it refuted the plaintiffs’ claim that Texaco had left unremediated environmental problems in Ecuador,” Hunter said.

So when Chevron Corporation brought a motion seeking a dismissal of the action against it (the summary judgment motion dealt only with Chevron Canada), the plaintiffs had clearly had enough — and consented to the dismissal. The formal order issued in July 2018.

“The gathering momentum from a chorus of tribunals which condemned the Ecuadorean judgment represented a complete substantive victory for Chevron,” Lowenstein said.

Which didn’t mean that the story wasn’t a good one.

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