Québec – No enforcement of award against alter egos – #681

In a much-anticipated decision, the Québec Court of Appeal overturned Justice Pinsonneault’s first instance decision and quashed the seizure before judgment by garnishment taken against a subsidiary and non-party to an arbitration to answer for the debt of the parent pursuant to an arbitral award. Justice Pinsonneault’s decision was discussed in a previous case note concerning CC/Devas (Mauritius) Ltd. v. Republic of India, 2022 QCCS 7. In Air India, Ltd. v. CC/Devas (Mauritius) Ltd., 2022 QCCA 1264, the Court of Appeal unanimously granted the appeal of the parent, ruling that a foreign award cannot be enforced against a third party’s assets unless it is proven: (1) that the third party is the debtor’s alter ego; and (2) that the third party was used in order to conceal fraud, abuse of right or a violation of a public order rule by the debtor. The Court of Appeal ruled that the applicable criteria for the enforcement of a foreign award against the shareholder of a condemned party were the same as the applicable criteria to lift the corporate veil, as codified at section 317 CCQ. Here, those criteria were not met, and the court did not lift the corporate veil.

In an arbitration, an award was made finding the Republic of India liable for damages in the amount of US $111 million. At first instance, Justice Pinsonneault ordered a seizure before judgment by garnishment against Air India, a corporation wholly owned and controlled by the Republic of India. Air India’s assets had been seized in order to enforce the foreign award rendered against Republic of India. As a fully state-owned company and because of the important role played by Republic of India over Air India’s affairs, Justice Pinsonneault concluded that Air India was the Republic of India’s alter ego. As such, Justice Pinsonneault accepted that Air India’s assets could be used to enforce the award rendered against its sole shareholder if the award was homologated.

Both Justice Pinsonneault and the Court of Appeal referred to the Republic of India’s behaviour in trying to avoid the enforcement of the award all around the world.

Before the Court of Appeal, the Parties mainly debated the burden of proof required to enforce an award against a third party to the award. Air India alleged that the burden of proof required was the one required to lift the corporate veil. Since there were no allegations that Air India had participated in a fraud, abuse of right or violation of a rule of public order, there was no reason justifying a seizure against its assets. CC/Devas argued that international case law in arbitration matters favors enforcement against alter ego corporations in the specific case of a foreign award rendered against a foreign state.

The Court of Appeal dismissed CC/Devas’ argument that the applicable rules to “reverse pierce” the corporate veil (by finding liability of a company for its shareholder’s obligations rather than the reverse) were different in a situation of enforcement of a foreign award against a foreign state than in any other context. The Court of Appeal ruled that even in a foreign award enforcement context, Québec’s rule of law shall still apply. Canada’s voluntary assent to the New York Convention did not modify the applicable substantive law in Québec. Also, international case law should not be taken into consideration by the Court when a clear local rule is applicable.

In Québec, in order to lift the corporate veil, either in forward or reverse piercing, the Court shall apply section 317 CCQ, which states the following:

“317. The juridical personality of a legal person may not be invoked against a person in good faith so as to dissemble fraud, abuse of right or contravention of a rule of public order.

Therefore, in addition to the demonstration of an alter ego relationship between Republic of India and Air India, CC/Devas had the burden to prove that Republic of India was using Air India to dissemble a fraud, an abuse of right or a contravention to a rule of public order. Only then could the seizure before judgment by garnishment against Air India’s be sustained to answer for Republic of India’s obligations toward CC/Devas in the arbitral award.

The Court of Appeal also underlined the significance of distinct juridical personality, which applies to every company – even a single shareholder company. Allowing the lifting of the corporate the veil on the sole proof of an alter ego relationship between a company and its sole shareholder would unduly reduce the benefit of distinct juridical personality provided by law.

Update: Leave to appeal to SCC dismissed May 11, 2023

Contributor’s Note:

Enforcement of a foreign award against third parties to the arbitration is uncommon. Here, Air India was not a party to the arbitration, nor was it alleged to have been involved in the substantive matters in issue in the arbitration. In other words, it was not implicated in the termination of the agreement, which was the matter in dispute in the arbitration.

The Court of Appeal’s decision conforms with the principle previously established by the Supreme Court of Canada in Yugraneft Corp. v. Rexx Management Corp., 2010 SCC 19 that the subscription to the New York Convention shall not affect the application of local laws. That decision concerned the application of limitation periods to foreign award recognition. The Supreme Court of Canada has applied local legislation such as for limitation periods, even if it brings different results depending on the location where the recognition of the award is sought. On that same subject, see previous case note Québec – award treated as “judgment” subject to ten (10) year prescription (limitation) period – #259.

Québec case law has been particularly busy in the past year regarding third parties/non-signatories’ matters. Stay tuned for a complete review in my next hot topics’ note. A trend is born …