Canada: "Smith v. Inco": Environmental Class Action First

The July 6, 2010 decision of the Ontario Superior Court in Smith v. Inco is Canada's first environmental class action trial decision from a common law province. The Court awarded $36 million to approximately 7000 property owners for loss in property values attributable to nuisance and strict liability, arising from nickel contamination.

The Plaintiffs alleged that nickel emissions from Inco's Port Colborne refinery caused soil contamination on neighbouring properties. Public disclosures regarding the nickel contamination in September 2000 were alleged to have negatively affected values of class members' properties.

The Court was faced with the difficult task of adjudicating a claim twenty six years after the Inco refinery operations were concluded — more recent public announcements were alleged to have triggered a decline in property values in Port Colborne.

The Court's decision may be vulnerable on appeal in that Inco had not caused new contamination for 16 years at the time of the public disclosures; the fact of the contamination was arguably known prior to 2000 creating limitations issues; and the market evidence does not appear to establish on a balance of probabilities a causal connection between the loss in property values and the public disclosure.

Claims Not Statute-Barred

Inco operated its property as a refinery between 1918 and 1984, when it ceased all refining. It was common ground that the nickel contamination found on neighbouring properties largely originated from the Inco refinery. There were no new deposits by Inco after 1984. The Ministry of Environment (MOE) commenced testing of air, vegetation and soil in the 1970s. The MOE tested the surrounding soils in 1972, 1975, 1983, 1991 and 1998.

In November 1976, the MOE published the results of soil tests taken at 21 properties in the vicinity of Inco. The readings ranged between 3,000 and 6,000 parts-per-million (ppm), with one reading at 16,500 ppm. Elsewhere most readings were in the range of 1,000 to 6,000 ppm with one reading of 24,000 ppm. These were substantial exceedences measured against the MOE guideline of 200 ppm. It is not clear whether individual owners received copies of the report, although it is expected that they would have been entitled to the results.

An owner reviewing the report would have been alerted to the fact that there were nickel deposits exceeding the MOE standard by as much as 120 times. It is strongly arguable that knowledge of the exceedence is knowledge of the property damage sufficient to found a claim.

After Inco shut down its refining operations in 1984, the MOE conducted further studies. In 1991, the MOE performed a large scale study to determine the nickel soil footprint around Inco. A July 1994 report concluded that the "soil to at least 10 centimetres in depth was severely contaminated with nickel". Severe contamination is property damage. Nickel in the soil exceeded the MOE guideline in 36 of 37 test sites. The highest reading was 9,750 ppm southwest of the refinery, relative to the guideline level of 200 ppm. Property owners who had made a specific complaint would have received a copy of the report. However, there were no studies linking the property damage to health risks at that time. A copy of the report was available in the Port Colborne library.

A 1998 MOE study of 80 properties released in January 2000 showed nickel levels exceeding 14,000 ppm in certain properties, while the guideline level for nickel contamination remained at 200 ppm. The MOE then initiated a human health risk assessment (HHRA). The 2000 MOE report showed two nickel hot spots, the highest levels of concentration being in the range of 15,000 ppm. The judge took that report as the beginning of time for discovering the claim.

In March 2002, as a result of the HHRA a soil "intervention level" for nickel was set at 8,000 ppm to "protect toddler aged children". Inco was ordered by MOE to remediate properties with a nickel level higher than 8,000 ppm. Twenty-five properties were designated for remediation. All except the representative Plaintiff's property have been remediated.

The Court concluded that publication of results by the MOE and the Public Health Department triggered the Plaintiff's claim to damages. The Plaintiff lead evidence that the publication resulted in a drop in property values. The Court appears to have conflated the damage completed no later than 1984 by Inco, with the publication of test results by governmental bodies 16 years later. The Court accepted that the average person in the class could not reasonably have known about the impact on property value until 2000. However, the better question would have been, could a Plaintiff class member reasonably have known that their property was damaged prior to 2000? Based on the MOE publications, it would have been possible for the Court to conclude that such knowledge was available.

Rylands v. Fletcher Liability Found

The Plaintiff's claim had two common law bases. Firstly, the court found that Inco was strictly liable for bringing nickel onto its land to refine it and creating airborne nickel particles which were deposited on neighbouring properties. These deposits constituted a non-natural use of the property and created an increased danger to others, satisfying the first element of Rylands v. Fletcher strict liability. The nickel deposits had the potential to do damage, satisfying the second element of Rylands.

The trial judge specifically rejected Inco's argument that Rylands v. Fletcher is restricted to an isolated escape. The judge concluded that if an unnatural substance is brought onto a property which creates a potential danger for a neighbour, and the substance escapes and causes damage, then there is no reason to restrict Rylands v. Fletcher to a single isolated escape. Further, he explained that strict liability supplants negligence and nuisance for "abnormally dangerous activities."

Nuisance

The Plaintiff also sought damages for injury to property caused by Inco's nuisance. The judge accepted that physical damage was caused by the deposit of nickel onto the soil. The judge concluded that physical damage to the neighbouring properties was "material" if the amount that accumulated was such as to negatively affect the value of the property. Inco unsuccessfully argued that a class member is not entitled to make a claim for diminution of property value unless they had sold or attempted to sell the property. On an alternative analysis, the Court could have found that property was damaged when it was "severely contaminated"; however, this analysis would have likely resulted in the claims being out of time.

Causation

The judge assumed "two common sense causal connections" existed as between negative publicity regarding soil contamination and property values:

  1. The value of residential property is reduced if located close to a large industrial operation. Depression of values existed long before any negative publicity about nickel in the soil in Port Colborne.
  2. Environmental contamination in a community negatively affects residential property values.

Damages

While the trial held that negative publicity and public disclosures of the nickel contamination starting in the year 2000 logically caused a negative effect on residential property values in Port Colborne, the expert evidence also suggested other trends that may not have been fully canvassed by the Court. The Plaintiff's expert used Municipal Property Assessment Corporation (MPAC) data from 1996 to 2008 to do a statistical analysis comparing changes in property values in Port Colborne with those in Welland, a neighbouring community. The MPAC data showed that property values in Port Colborne actually increased between 1996 and 2003, relative to Welland. After 2003, the increase in values in Port Colborne slowed down relative to Welland. The continued increase in values may not be consistent with the publications in 2000 triggering a loss in property value. It suggests the influence of other market factors that are not reflected in the Court's decision.

The defence tendered evidence that Port Colborne property values actually outperformed Welland sale prices after 2004. This suggests that there was no permanent loss in value to the Port Colborne properties. The trial concluded that the Plaintiff had proved, on a balance of probabilities, that the negative publicity and public disclosures after September 2000 significantly affected property values in an area closest to the refinery, somewhat less so further away from the refinery, and had only a slight effect on the property values in another segment further still from the refinery.

The current decision does not address who will be entitled to the receipt of the damages. Many of the properties may have changed hands between 2000 and the date of trial. Further transfers between the date of the decision, and a likely appeal, can also be anticipated, exacerbating the difficulty of making this determination.

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