Canada: Court Of Appeal Affirms Polluter Pays Principle Is Paramount

The major recent decision of the British Columbia Court of Appeal in J.I. Properties Inc. v PPG Architectural Coatings Canada Ltd, 2015 COURT OF APPEAL 472 ("JI Properties") affirmed the "polluter pays" principle in the context of remediation cost recovery actions under the  Environmental Management Act, SBC 2003, c 53 (the "EMA").

Background

This case stems from the remediation of portions of James Island that were contaminated with lead, mercury, TNT, DNT, and other hazardous substances (the "hazardous substances") due to the manufacture of explosives on the island from 1913 to 1985.

PPG Architectural Coatings Canada Inc. ("PPG"), formerly known as ICI Canada Inc. ("ICI"), owned James Island from 1954 to 1988 and undertook remediation of part of the island from 1986 to 1988. At the time there were no legislated standards for contaminants in British Columbia, so ICI and the BC Ministry of Environment and Parks (the "Ministry") agreed on the criteria to apply to its remediation of the hazardous substances.

ICI went on to remediate six areas of the island in accordance with the established criteria. Following a review of the remediation conducted by ICI, the Ministry confirmed in a letter that ICI had met the established criteria based on the proposed restricted use of the area and stated that the Ministry did not "perceive any further environmental concerns" (the "Comfort Letter"). ICI subsequently registered a restrictive covenant on title that gave notice to successors in title that portions of the island were used for manufacturing explosives and batching chemicals and there was a risk of contamination. The covenant prohibited the construction of residential premises on several of the areas where remediation was conducted.

J.I. Properties Inc. ("JIP") purchased James Island in 1994 and was aware of its historic use, the restrictive covenant, and the ensuing remediation process and reports. JIP also had legal opinions dealing with contamination.

In 1997, the Waste Management Act, RSBC 1996, c 482 (the "WMA") and the Contaminated Sites Regulation, BC Reg 375/96 (the "CSR"), came into force, and established an entirely new regime for the remediation of contaminated sites, based on the polluter pays principle. The WMA was subsequently replaced in 2003 with the EMA, RSBC 2003, c 53.

JIP developed James Island into a golf course with residences. JIP remediated portions of James Island from 2004 and 2006 to meet the new standards prescribed by the CSR. Following the remediation JIP applied for and received a certificate of compliance pursuant to the EMA and commenced litigation against ICI in 2009 to recover its remediation costs. JIP subsequently listed the island for sale.

Liability for Remediation of Contaminated Sites

At trial, ICI tried to avail itself of the "certificate of compliance exemption"1 to avoid liability for the costs of remediation. It argued the Comfort Letter was the equivalent of a certificate of compliance. The court held that the Comfort Letter did not meet the statutory definition of a "certificate of compliance" and there was no express intent in the EMA or the CSR to exempt persons who remediated contaminated sites before the regulatory regime was implemented, accordingly ICI was not exempt from liability.

On the appeal, ICI argued the trial judge was wrong and that it fell within the exclusion in section 46(1)(m) of the EMA because the Comfort Letter was the equivalent of a certificate of compliance.

The Court of Appeal upheld the trial judge's decision on the basis that the Comfort Letter had been supplied prior to the contaminated sites regulatory regime coming into force and did not meet the statutory definition of a certificate of compliance. Further, the Court of Appeal affirmed the trial judge's finding that the legislation did not provide any immunity or "grandfathering" for those who had undertaken remediation before the current regime or had been given a "comfort letter" by the Ministry.

This ruling effectively means comfort letters issued by the Ministry will provide no protection to those who cleaned up contamination before the current regime and no comfort if challenged to those who relied on them for financing and transaction decisions.

Quantum and Allocation of the Remediation Costs

The trial judgment ultimately imposed 100% of the liability on ICI because JIP was "very much an innocent party" that had not contributed to the contamination. Accordingly, JIP was awarded $4.75 million as compensation for its remediation costs, payable entirely by ICI.

On appeal, ICI argued that, even if the Comfort Letter was not considered a certificate of compliance, it should have been given significant weight in the trial judge's allocation of remediation costs between the parties. ICI submitted that section 46(1)(m) of the EMA embodies a "developer pays" principle which dictates that a current owner is to be responsible for the cost of additional remediation where they are fully informed of past contamination and choose to undertake remediation to change the use of the land for their own benefit. ICI argued that since it had remediated the affected lands to the standards in place at the time, it should be absolved from having to reimburse JIP for the additional remediation.

ICI's position at the appeal was that the trial judge had erred in principle by not allocating any of the remediation costs to JIP and by not properly exercising his discretion to allocate costs between "responsible persons." In support of this argument, ICI pointed to section 47(9) of the EMA and section 35 of the CSR, which grant discretion to the courts to allocate costs and reference equitable defences and a "fair and just allocation". ICI argued that the trial judge had failed to consider all equitable defences, as required by the CSR, particularly where ICI had done everything right, met all Ministry requirements and had the Ministry's confirmation to that effect.

The Court of Appeal rejected these arguments and held that the trial judge had properly exercised his discretion. The trial judge had explicitly considered ICI's "developer pays" argument, but in the absence of evidence that JIP had paid a discount for James Island or that its value had increased after the remediation, he held that there was no basis for the Court to allocate any portion of the remediation costs to JIP. The Court of appeal affirmed this approach.

The Court of Appeal also rejected ICI's argument that the "developer pays" principle applies to apportionment of liability and the allocation of remediation costs. It agreed that paragraph 46(1)(m) incorporates a principle of liability such that, if certain conditions are met, a responsible person will be exempt from liability. However, this provision is a defence and does not deal with apportionment of liability or allocation of remediation costs.

In discussing these issues, the Court of Appeal commented that the regulatory scheme is not only intended to ensure that a polluter pays, but also to compel the timely remediation of contaminated sites by forcing current owners to remediate as a pre-condition to securing other regulatory approvals. The Court of Appeal agreed with JIP's argument that one cannot raise unfairness as a consideration under the CSR for consequences that are the direct result of the interlocking statutory regime.

The Court of Appeal's decision in JI Properties appears to reject equity and fairness as an allocation tool even though those principles are in the EMA and the CSR. It will likely take particularly egregious facts for a future case to revisit these principles in allocating remediation costs.

Limitation Period

At trial, the court had to determine the limitation period applicable to cost recovery actions under the EMA that arose prior to the repeal and replacement of the former Limitation Act, RSBC 1996, c 266 on June 1, 2013. The court held that cost recovery actions under the EMA are not based on contract, tort, or statutory duty and therefore, are not governed by the two year limitation in subsection 3(2) of the Limitation Act and the default six year limitation period applied.

On the issue of when the cause of action arose, the trial judge held that if any costs of remediation were incurred within the limitation period, all costs were aggregated and recoverable, even those incurred well in the past and outside the limitation period.

The Court of Appeal upheld the ruling by the trial judge that a six year limitation period applied. Given that the parties had agreed that the remediation costs here began to be incurred within the six year period before the action was started, the Court of Appeal did not need to deal, and so did not, with the trial judge's findings about when the cause of action arose.

Since these important findings were not disturbed upon appeal and the entire decision was upheld, they remain good law. However, it is certainly open for reconsideration and it would be prudent for people incurring remediation costs to commence their recovery action within six years of first incurring such costs.

Footnotes

1. EMA at s 46(1)(m): a person who was a responsible person for a contaminated site for which a certificate of compliance was issued is not responsible for remediation when a subsequent owner changes the use of the site and provides additional remediation.

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