In a pair of decisions, the Federal Court of Appeal reminded litigants of the limits of enforcing arbitral awards. In Delizia Limited v. Nevsun Resources Ltd., 2017 FCA 187 and Delizia Limited v. Sunridge Gold Corp., 2017 FCA 188 the court upheld two corresponding lower court decisions, Nevsun Resources Ltd. v. Delizia Limited, 2016 FC 393 and Sunridge Gold Corp. v. Delizia Limited, 2016 FC 392, which overturned a Prothonotary’s order of garnishment against non-parties to the arbitration, Delizia Limited v. Eritrea, 2015 FC 33 and Delizia Limited v. Eritrea, 2015 FC 34, when doing so would require the court to pierce multiple corporate veils on the basis of the debtor’s control over them.
The decisions serve as a caution, tempering enthusiasms, about the ability of arbitration awards to deliver financial results at the enforcement stage even with the benefit of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958). In the present cases, the New York Convention was approved and declared to have the force of Federal law in Canada by virtue of the Federal legislation United Nations Foreign Arbitral Awards Convention Act, RSC 1985, c 16.
The two cases share a substantial common procedural history as they stem from the same arbitration and similar approaches to enforcement by the successful claimant in the arbitration. Each set of reasons for judgment provides a thorough review of the corporate structures and contractual matrix which the courts at the three levels had to examine. The courts’ reviews are thorough and provide a rare insight into what facts may or may not work at the execution stage and are recommended reading.
Readers need only read one of the decisions to appreciate the arbitral award enforcement issues raised in both cases. Since Delizia v. Sunridge at paragraph 30 refers to the more complete reasoning in Delizia v. Nevsun as its set of reasoning, this note will refer only to the Delizia v. Nevsun reasoning. Both cases do offer nuances that will be of interest to readers interested in a closer look.
“ Delizia sold military aircraft equipment to Eritrea in 2003 but did not receive full payment. Under the terms of the contract, Delizia commenced an arbitration proceeding before the Arbitration Institute of the Stockholm Chamber of Commerce. Eritrea did not fully participate in the arbitration proceedings and an arbitral award of $2,175,775 (US) was issued in favour of Delizia on April 18, 2006. Including arbitral fees and interest, the amount increased to $4,062,428.70 as of July 17, 2013, the date of the Order of Justice Mactavish registering the arbitral award and rendering judgment for this amount (the Recognition Order). This was an ex parte proceeding. Eritrea was not served with the notice of the proceeding nor the Recognition Order.”
As the successful claimant in the arbitration relying on a recognized and enforceable final award, Delizia then move to execute on it. What makes the two lines of cases noteworthy is how Delizia applied against non-parties to the arbitration in its enforcement efforts.
Delizia applied ex parte for an order against both Nevsun and Sunridge in two separate files for a show cause order against each as garnishee. Neither had been named as a party to the arbitration agreement or involved at any stage of the arbitration proceedings. Nonetheless, based on the extensive facts provided to the court, the Prothonotary issued a provisional order of garnishment issued against each entity in July 2013 and a final order against each was issued in January 2015.
Nevsun, through its subsidiaries, operated a gold, silver and base metal mine in Eritrea. Sunridge explored for and developed mineral deposits and explored and developed a copper-zinc-gold-silver project in Eritrea. Through the application of laws in Eritrea, different in each case and applicable on different facts, Eritrea directly or through a corporation it controls, obtained either an equity interest or the right to payments resulting from the mining operations involving Nevsun and Sundridge. The corporate structures in each case are complex enough to merit their own individual organigrams reproduced in each of the respective reasons. The organigrams also benefit from a supporting narrative in each case to outline the anticipated flow of value within and from the structures and the alleged connections between Eritrea and Nevsun and Eritrea and Sunridge. The Prothonotary eventually issued a final order of garnishment in each case.
In Nevsun : the Prothonotary issued an order against Nevsun to, inter alia ““attach all debts owing and accruing from Nevsun or its subsidiary BMSC to the State of Eritrea, including governmental bodies”. By making Nevsun liable for amounts owing by its subsidiary, the Prothonotary was piercing or lifting the corporate veil.”
In Sunbridge : “the Prothonotary found that certain licence exploration fees were debts owing by Sunridge to Eritrea. The Prothonotary also found that the issuance of shares by AMSC to ENAMCO was effectively a sale of shares by Sunridge to Eritrea and should not have occurred based on the provisional order of garnishment. Sunridge was ordered to pay the sum of $4,371,618 (to be perfected). The order also provided that “all debts owing and accruing from Sunridge to the State of Eritrea, including ENAMCO” were attached in favour of Delizia.”
On appeal to the Federal Court, Mr. Justice Henry S. Brown conducted a de novo review and upheld the application of the State Immunity Act, RSC 1985, c S-18. Delizia did not challenge the court’s decision on state immunity but challenged the court’s de novo approach and defended piercing the corporate veil.
The reasons on appeal include helpful analysis of whether the de novo approach was appropriate and focused on the grounds to pierce a corporate veil. The Court of Appeal held that the particular facts in each case allowed the Federal Court to apply a de novo approach and the discussion is not peculiar to arbitral award enforcements and need not be highlighted here.
The Court of Appeal did provide helpful comments on why corporate veils can be pierced. The Court of Appeal agreed with the Federal Court that the corporate veils in each case should not be pierced and upheld the decisions quashing the final garnishment orders.
In its review, the Court of Appeal held that the Federal Court judge did not commit any error in his analysis of the law in regard to piercing the corporate veil and readers should review them for further information. That analysis is produced at length in the Federal Court’s reasons so judgment.
The Prothonotary found as a fact, and the Federal Court and Court of Appeal agreed, that the corporate structure applicable in the Nevsun situation pre-existed the garnishment proceedings and was not put in place to avoid the garnishment.
“ I agree with the Federal Court judge 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. There may well be tax implications of undoing a corporate structure. Nevsun should not have an obligation to change its structure to benefit a third party.”
In addition, the Court of Appeal was influenced by the fact that any such execution proceedings would have to “pierce several corporate veils.” In that regard, each of the three levels of the Federal Court analyzed the reasoning of the Supreme Court of Canada in Kosmopoulos v. Constitution Insurance Co.,  1 SCR 2, 1987 CanLII 75. Kosmopoulos v. Constitution Insurance Co. explored the legal effect of maintaining a corporation distinct from its shareholders. The Supreme Court held that courts can ‘lift the corporate veil’ when not doing so would, inter alia, yield a result “too flagrantly opposed to justice.” The Court of Appeal noted that regarding a corporation as a “mere agent or puppet is not a condition that would justify lifting a corporate veil but rather it is a consequence of lifting the corporate veil.”
The reasons do provide helpful comments on why execution attempts based on piercing the corporate veil cannot be based on the debtor’s control of the of the third-party corporations:
“ The unpaid debt, in this case, is not a debt of any of the corporations whose veil was being lifted. If the corporate veil could be pierced for debts of creditors of a corporation then it could also be pierced for debts of that corporation. Lifting the corporate veil could then be done in any situation where a person owns all of the shares of a particular corporation (and hence the corporation could be viewed as the puppet of that person) and the corporation has an unpaid liability. Any individual who owns all of the shares of a company would then be personally liable for the debts of that corporation. In my view, this cannot be the correct result and I agree with the Federal Court judge that control alone cannot justify lifting the corporate veil to hold a shareholder liable for the debts of that corporation.”
The Court of Appeal concluded that the absence of facts justifying lifting the corporate veils was enough to dispose of the matter and did not consider the state immunity arguments as doing so would now be obiter.
Postscript: A November 13, 2017 application for leave to appeal to the Supreme Court of Canada has been filed by Delizia in each of the two separate court files.