A recent decision out of Newfoundland should remind prospective
purchasers of real estate NOT to count on Environmental Site
Assessments (ESAs) or other environmental reports commissioned by
the seller, unless they acquire a specific contractual right to
rely on that report, e.g. through a reliance letter. Real estate
lawyers, take note, please.
In Community Mental Health Initiative Inc. v. Summit Lounge
CanLII 63978 (NL SCTD), the plaintiff, CMHI, entered into a
purchase agreement to buy property from the defendant, Summit. The
purchase agreement required Summit to provide CMHI with a Phase I
Environmental Site Assessment in order to demonstrate that the
property was free from contamination. The vendor hired a well known
environmental consultant, Stantec, to conduct the ESA. Stantec issued a
report concluding there were no grounds for concern. The seller
provided the ESA to the buyer who then completed the real estate
transaction. The buyer subsequently found hydrocarbons on the
property. The buyer sued Stantec claiming that its Phase I ESA
report contained misstatements and wrong information.
Stantec successfully filed a summary trial application to have
the claim dismissed, arguing that it only provided the ESA for use
by the seller, and it had no privity of contract with the
The court referred to the following provision in the Agreement
of Purchase and Sale:
"Vendor will provide Purchaser with a Phase 1 Environmental
Site Assessment, at Vendor's cost, verifying that the property
is free of any potential or actual environmental
The court also referred to this standard provision from the
Scope of Services Agreement entered into between the seller and
"Third Party Reliance: Only the Client shall be entitled to
rely on the Documents provided ... in the performance of the
Services. The Documents relate solely to the Services for which
[Stantec] has been retained and shall not be used or relied upon by
the Client or any third party for any variation or extension of the
Services, any other project or any other purpose. Any unpermitted
use by the Client or any third party is strictly
Finally, the court referred to the following statement in the
final Phase I ESA report:
"7.0 Closure: This report has been prepared for the sole
benefit of [the seller]. The report may not be used by any other
person or entity without the express written consent of [the seller
and the contractor]. All parties are subject to the same limit of
liability as agreed to in the contract under which the work was
completed. Any use which a third party makes of this report, or any
reliance on decisions made based on it, are the responsibility of
such third parties. [The contractor] accepts no responsibility for
damages, if any suffered by any third party as a result of
decisions made or actions taken based on this report."
These clauses are found in essentially all environmental
consultant's reports in Canada.
The Court held that Stantec owed no duty of care to the buyer.
Referring to the U.K. House of Lords decision Hedley Byrne
& Co. v. Heller & Partners,  A.C. 465 (H.L.),
the principles of which were applied by the Supreme Court of Canada
in Edgewood Construction Limited v. N.D. Lee Associates,
 3 S.C.R. 206, the court held that a duty of
care will not arise when, in the contract, the defendant employs
specific language disclaiming such a duty.
Why don't real estate lawyers know about environmental
This result should not have been a surprise. Environmental
lawyers know that this principle was established nearly twenty
years ago by the Ontario Court of Appeal in Wolverine Tube
(Canada) Inc. v. Noranda Metal Industries Ltd.,  26 O.R. (3d) 577. There, an environmental
consultant prepared a Phase 1 ESA for three of his client's
properties. The Ontario Court of Appeal found that a subsequent
purchaser could not maintain a claim in negligence against the
consultant in light of a disclaimer clause which negated any duty
of care to the purchaser. That is exactly what reliance letters are
Nearly twenty years after Wolverine Tube, why don't
real estate buyers ask for a reliance letter? (Not that a Phase 1
guarantees anything anyway.) Why do so many buyers continue to
believe that they are "entitled" to receive a clean site?
And why don't real estate lawyers disabuse them of this
dangerous and expensive notion?
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