A Destination for ‘Tort Tourism’
U.S. firms will flee Canada if courts back Ecuadorean judgment
By Thomas J. Donohue-Financial Post, October 23, 2012
What’s the fastest way to slam the door shut to foreign investment? A legal system that tolerates lawsuit abuse.
As we know all too well in the United States, when the legal system becomes a profit-making mechanism for enriching plaintiffs’ lawyers at the expense of employers and investors, it fails to deliver justice. And a system of chronic abuse costs businesses, workers and consumers hundreds of billions of dollars each year. It tells foreign investors to take their money elsewhere.
Why does this matter for Canada? It’s hardly considered a lawsuit Mecca. Certainly when compared with the United States, it isn’t. But when it comes to the enforcement of legally questionable foreign judgments, Canada has some of the most favorable standards for plaintiffs in the developed world. That makes Canada a target for a new form of abusive legislation I call “tort tourism.”
It works like this: Plaintiffs’ lawyers file tort lawsuits abroad in order to secure large awards against companies in weak or corrupt foreign courts. The lawyers then seek to collect those judgments in countries with liberal rules favoring recognition of foreign judgments. The United States is a popular destination for this tort tourism.
A recent case may signal the expansion of this abuse into Canada. In May, a group of Ecuadorian plaintiffs asked the Superior Court of Ontario to enforce a massive US$18.2-billion judgment against Chevron Corp. that was issued by a court in Ecuador last year. The judgment was related to environmental damage allegedly caused by Texaco’s oil operations decades earlier, even though Texaco — which Chevron acquired in 2001 — ceased operations in Ecuador in 1992 and settled outstanding claims for environmental cleanup with the Ecuadorian government in 1994.
The decade-long litigation against Chevron in Ecuador has been plagued by egregious fraud, including forged expert witness reports, judicial misconduct, and bribing of judges and witnesses. Chevron is challenging enforcement of the judgment in the United States and has filed a racketeering lawsuit against the plaintiffs’ U.S.-based lawyers.
The plaintiffs, however, are undeterred. According to a previously confidential memo that was disclosed as part of the ongoing litigation, the plaintiffs’ strategy is to seek enforcement of the judgment in certain “keystone” countries with favorable foreign-judgment enforcement standards. And the next stop on their lawsuit abuse tour just happens to be Canada.
For the plaintiffs, Canada is an attractive venue because of Chevron’s large operations in the country — thanks in large part to good reforms that have attracted energy investment. Should the Ontario court rule against Chevron, all of these operations could be seized in order to enforce payment of the US$18.2-billion judgment, placing thousands of jobs and billions of dollars of economic activity at risk. The energy industry, which has driven much of Canada’s extraordinary growth, could take a direct and devastating hit.
You can see why many business leaders are spooked by this case. In effect, Canada’s problematic foreign-judgment enforcement standards leave companies at risk. Why would they choose to invest in Canada when their operations might be threatened in this way?
The economic consequences could be severe. Canada’s FDI totalled more than US$560-billion in 2010, with much of that concentrated in the key oil and gas sector. With one in 10 Canadian jobs dependent on foreign investment, Canada should aggressively address this obvious threat to its investment climate.
Canada has made incredible progress over the last 25 years in developing a pro-business environment. Thanks to tax and entitlement reform, a practical immigration system, and an energy strategy to take full advantage of its vast resources, Canada is growing faster than any other G7 nation today. If it wants to remain one of the most attractive places in the world to do business, it must not foster a legal system that allows flagrant abuse. To do otherwise would signal to investors that Canada is no longer open for business.