Canada: Environmental Review Tribunal Confirms The Liability Of Current And Former Directors For Clean-Up Orders

In its recent decision in Currie v. Director, Ministry of the Environment (Currie) issued on June 7, 2011, the Environmental Review Tribunal (ERT) has applied its reasoning in its Corporation of the City of Kawartha Lakes v. Director, Ministry of Environment decision issued on November 20, 2009 (Kawartha Lakes) to hold corporate directors personally liable to clean up a contaminated site. The implications of the decision may be far-reaching. Corporate directors may be required to carefully scrutinize the actions taken by their fellow directors and the corporation in responding to environmental issues, or risk being held personally liable for environmental clean-up orders.

Background

The Appellants, the current and former corporate directors (the Directors) of 815244 Ontario Inc. (815), challenged a Ministry of Environment Director's Order issued under section 18 of the Ontario Environmental Protection Act (the EPA). The Order required the Directors to undertake remediation work in relation to a property that was previously occupied by a resin production facility, including securing the site to prevent access, retaining a waste management professional to assess the site, disposing waste located on the site and assessing the potential for off-site migration.

Ministry involvement with the site commenced in 1989, when provincial officers noted 250 45-gallon barrels of liquid waste at the site, some of which were leaking. In 1995, representatives of the Ministry met with the directors and outlined their concerns, including concerns about potential groundwater and soil contamination. In 1996 a field order was issued, which required the removal of waste from the site. In 2005, a provincial officer's order (the 2005 Order) was issued to 815 and later revoked and re-issued to 1198906 Ontario Ltd. (119), a company which had care and control of the site beginning in 1998 pursuant to a lease agreement with 815. In 2006, 815 sold the property to 6020747 Ontario Ltd. (602), but the sale was not registered on title until 2008. A second provincial officer's order was issued in 2008 (the 2008 Order) as a result of the orderee's failure to comply with the 2005 Order. A site inspection revealed the presence of chemicals stored in an unsecured laboratory, bags of suspected asbestos, outdoor chemical storage tanks with unknown contents, a storm water pond with an unknown discharge point, and an intermittent resin odour. By January 2009, none of the work required under the 2008 Order had been completed.

In May of 2010, a further Director's order (the 2010 Order) was issued to the current and previous directors of the current and previous corporate owners and operators of the site, on the basis that the previous owners left uncharacterized waste at the site. This uncharacterized waste created a risk of off-site contamination that was not remedied by the subsequent owners and operators.

Findings of the ERT

Section 18 of the EPA empowers the Director to issue an order to any person "who owns or owned or who has or had management and control of an undertaking or property" in cases where the order is necessary to prevent or reduce the risk of a contaminant discharge from the property or to prevent or decrease an adverse effect from the presence or discharge of the contaminant.

The Directors presented a variety of arguments to challenge whether they (as opposed to their corporations) had a sufficient degree of "management and control" of the site to be subject to the 2010 Order. In the alternative, the Directors challenged whether it was "fair" that they should be subject to the 2010 Order, given the nature of their involvement, the passage of time, and the fact that the Ministry had redirected its regulatory attention to more recent corporate owners in the 2005 Order.

On the question of management and control, the ERT reiterated its 1995 ruling in Caltex Petroleum Inc. v. Ontario that the onus is on corporate directors to present evidence of their lack of involvement if they wish to avoid being subject to an order. The ERT held that the indicia of legal liability by way of registered corporate documents create the presumption that the reality is in conformity with the legal descriptions that the parties have chosen in organizing their affairs. This presumption can only be rebutted by a "very convincing case."

The ERT found that the evidence demonstrated that the Directors had management and control of the site from 1989 to 1998, and that the environmental risks present during this period of time persisted through to the present. In fact, the environmental concerns first raised by the Ministry in 1989 may have actually worsened over time. Further, the ERT found that "the fact that the property was sold to a third party does not relieve of responsibility the parties that managed and controlled the very risks that were created when they were in charge of the Site".

The ERT concluded that the Directors failed to rebut the presumption of a corporate director's involvement in the affairs of the corporation, and that they did not present a "very convincing case" to the contrary.

On the question of "fairness," the Directors argued that they should be relieved from the requirements of the 2010 Order based on a number of grounds, including the "fairness factors" articulated in Ontario (Ministry of the Environment and Energy, Southern Region) v. 724597 Ontario Inc. (c.o.b. Appletex) (Appletex), as well as detrimental reliance on Ministry representations, unjust enrichment and abuse of process. This Osler Update considers only the first ground raised by the Directors: the Appletex "fairness factors."

Citing its 2009 decision in Kawartha Lakes, the ERT noted that, with respect to the "fairness" principle, the Tribunal's "approach to the exercise of discretion has evolved since the time when Appletex was decided." The ERT will no longer merely consider what is "fair" to an appellant. Rather, appellants must show that exempting them from liability will serve the purpose of the EPA:

The Kawartha Lakes (2010) decision reflects the basic approach in the Ministry's Compliance Policy. The Compliance Policy document seeks to both interpret and apply the core purpose of the EPA and outlines the relevant factors and circumstances for the statutory decision-maker. With respect to the present proceeding, the Compliance Policy notes that the named person in an order must show that "the purpose of the provision authorizing the issuance of the control document and the statute will be served, and not impaired, by exempting the person from the control document."

In dismissing the appeal, the ERT found that the purpose of the EPA was not served by removing the Directors from the 2010 Order merely because subsequent owners and corporate directors had become responsible for the site and had been named in the 2010 Order, or because the Ministry had failed to take regulatory action against the Appellants despite having concerns about the site dating back to 1989. In the result, the ERT confirmed the terms of the 2010 Order on a joint and several liability basis, and refused to apportion liability amongst the orderees. The ERT noted that, if necessary, such a remedy could be pursued through subsequent litigation. It is not clear what cause of action could be asserted as a basis for such a claim.

Implications

The ERT in Currie determined that the Director's power to issue orders under section 18 extends to all corporate directors, both current and previous, provided the corporate directors have the requisite degree of management or control. In addition, directors who are not involved in the day-to-day operations of an enterprise may not be able to rely on the diligence of their fellow directors in complying with environmental clean-up orders. In this respect, Currie may depart from the general standard articulated in the Ontario Business Corporations Act (OBCA), which provides that directors must:

(a) act honestly and in good faith with a view to the best interests of the corporation; and

(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

The OBCA exempts directors from liability if they exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances, including reliance in good faith on the report or advice of an officer of the corporation. The ERT in Currie did not address the question of whether the provisions of the OBCA should be considered in the context of clean-up orders issued against corporate directors. Instead, the ERT found that the Appellants knew, or ought to have known, about the unresolved environmental problems at the site and should have addressed these problems.

It is therefore important that decisions made and actions taken by the corporation in response to a clean-up order are carefully scrutinized by corporate directors, and that directors ensure that appropriate indemnity agreements and insurance policies are put in place to limit their personal liability. As this decision illustrates, such measures should, if possible, remain in force even after a director ceases to hold such a position in the corporation.

Corporations should also maintain all appropriate records in order to enable directors to demonstrate their diligence or reasonable reliance on the judgement of fellow officers and directors. Otherwise, the ERT will presume, absent a very convincing case to the contrary, that reality conforms to the legal descriptions that the parties have chosen in organizing their business. For more information on limiting directors' liability, please refer to the Osler publication Corporate Governance in Canada: A Guide to the Responsibilities of Corporate Directors in Canada.

Jack Coop specializes in all aspects of environmental litigation: civil actions, prosecutions, class actions, administrative hearings, and judicial review applications, including advice work on how to avoid such litigation and successfully deal with regulators. Dan Kirby focuses on environmental law, including environmental assessment and approvals; civil litigation; alternate dispute resolution; advice with respect to commercial transactions. Lindsay Rauccio has experience in a range of corporate-commercial matters, including contractual disputes, insolvency litigation, competition litigation and class actions

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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