Canada: Director And Officer Liability In Environmental And Other Oil And Gas Applications

Last Updated: April 10 2017
Article by Evan W. Dixon, Carole Hunter and Hazel Saffery

IN ALBERTA, DIRECTORS AND OFFICERS OF COMPANIES MAY FACE PERSONAL LIABILITY UNDER ENVIRONMENTAL AND REGULATORY STATUTES, particularly under the Environmental Protection and Enhancement Act1 (the EPEA), and the Oil and Gas Conservation Act2 (the OGCA) and their regulations.

The wording and structure of that legislation is broad, but the probability of the Alberta Energy Regulator (the AER), or the Courts imposing personal liability on a director or officer has been quite low. The AER (and its predecessors) have made limited use of this power. Yet, the current economy and political climate might affect the AER's approach. Historically, receiverships or bankruptcies of insolvent companies have dealt with all corporate assets. Recently, secured creditors have been prone to appoint receivers over a limited number of profitable assets, leaving the companies with no ability to continue operations with the remaining assets. In response, directors and officers have resigned, leaving no one managing those assets.

Given the current dearth of cases in which AER has imposed personal liability on directors or officers, the risk of potential liability will likely depend greatly on the specific factual situations that develop. As with all regulatory schemes, a party's history of compliance and willingness to. work with the AER will have a significant impact on the response and likelihood of the AER seeking to impose personal liability on an officer or director.

Personal Liability for Company's EPEA Offences

The EPEA is Alberta's main piece of environmental legislation. Its primary purposes are to support and promote the protection, enhancement and the use of the environment. The AER is responsible for regulating discharges (including spills), sustainable development, reclamation and assessments for future energy projects. The fundamental premise of EPEA is that the polluter pays. The EPEA holds responsible the entity or individual who has or had control or management of (1) the site which has been contaminated, or (2) the material causing the contamination.

The EPEA imposes personal liability on directors, officers and. agents where the corporation commits an offence under the legislation. This does not depend on whether the corporation has been prosecuted or convicted.3 Offences include carrying out prohibited activities or activities without authorization, failing to comply with orders or failing in one's duty to reclaim.

If guilty of an offence, individuals can face fines ranging from $250 to $100,000, as well as prison sentences of up to two years for the more serious offences. The court has the authority to impose additional prohibitions or direct actions (including community service). The court may even order (upon application) that the individual compensate for the loss of or damages to property suffered.

For most of the larger offences, the EPEA provides a due diligence defence which protects directors and officers who have executed their duties with the degree of care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances.

EPOs Can Target Individuals

The purpose of Environmental Protection Orders (EPOs) is to ensure that operations clean up the contaminations. The EPEA allows that an EPO can issue against an individual in circumstances dealing with:

  • the release of substance with adverse effect;
  • offensive odours;
  • a designated contaminated site;
  • a reclamation certificate;
  • an improperly run waterworks system;
  • a contaminated matter; or
  • a person responsible for a hazardous substance or pesticide.

In addition to the specific requirements to address the environmental issue, an EPO can: (1) require an individual to meet certain general requirements such as maintaining records; and (2) impose additional reporting requirements along with specific time limits.

When an EPO names more than one person (for example, a corporation and an officer), all parties are jointly responsible for carrying out the terms of the order, and are jointly and severally liable for payment of the costs of doing so. Those costs can be very high.

The AER's predecessor has issued EPOs against individuals in some cases, but generally only when the individual has been the sole directing mind of the corporation.4 EPOs against directors or officers of oil and gas companies have been particularly rare.

A number of cautionary Ontario decisions have imposed personal liability upon directors, officers or agents of companies facing environmental remediation obligations. In Currie5 directors of a closely held" corporation were liable to remediate environmental contamination on company property under their control and management.

As well, in Baker,6 the Ontario Environmental Review Tribunal (the ERT) refused to stay an EPO issued by the Ministry of Environment (the MOE) against directors and officers of an insolvent company where the directors and officers had not been in control or management when the contamination occurred. The ERT rejected the argument that the MOE should not have imposed liability until determining if the EPO had properly named the directors. Without a stay and facing large expenditures, the directors and officers settled with the MOE for $4.5 million, paying personally (insurance not being available). This decision had the effect of stretching liability beyond the concept of polluter pays" . Some of the directors and officers had been familiar with the remediation work, but none of them had management or control of the company when the pollution occurred.

The Orphan Well Fund is underfunded.7 Will that prompt EPOs against directors or officers? In some circumstances, few have suggested pursuing officers and directors to pay the cost to suspend/abandon/remediate a well or facility. But several policy reasons suggest otherwise:

  • When the company is simply insolvent, with a history of compliance, the AER would have difficulty justifying the imposition of personal liability. The directors and officers would likely commence litigation or oppose the EPO.
  • EPOs against directors and officers would likely cause significant net damage to the industry-the cost to the AER (and the Orphan Well Fund and the Province) of losing capable management would exceed the benefit of cost recovery. Many of the directors and officers of other companies would immediately resign.
  • Other methods to punish rogue directors/officers exist, such as a Section 106 order (discussed below).

AER Has Not Yet Pursued Personal Liability Under s. 108, OGCA

The OGCA is Alberta's primary legislation on oil and gas development in the province.8 The OGCA sets out the structure and processes to ensure proper and efficient development and conservation of resources, and establishes a licensing and approval scheme for drilling and operating facilities and the regulation of oil field and pool developments. The AER is responsible for administering and enforcing the OGCA including the licensing and approval process of all development under the legislation.

Under section 108(1) and (2) of the OGCA, principals of a corporation may face personal liability for the offence of contravening, or failing to comply with, any provision of the OGCA, its rules, or regulations of a license granted under the OGCA9 Well and facility licenses are granted under the OGCA and provisions of the OGCA set out a licensee's obligations regarding constructing, operating, abandoning and reclaiming wells and facilities.

The due diligence defense provides "that the person [more likely than not) took all reasonable steps to prevent ... commission [of the offence)". This defence is available for all offences. If guilty, an individual can face a fine of up to $50,000.

We are unaware of any circumstance that the AER (or any of its predecessors) has prosecuted a principal of an oil and gas company under section 108. AER has .recently forwarded threat of a section-108 order to corporate licensees that have not complied with the Inactive Well Compliance Program. Yet to our knowledge, this threat has not extended to directors or officers.

Individuals Named Sparingly in OCGA s. 106 Orders

Under Section 106 of the OGCA, the AER may make a declaration naming a director or officer as a party in control of a licensee that has contravened, failed to comply or failed to pay (Section 106 Declaration).

Within the declaration, the AER can order specific terms and conditions that will have a significant impact on the livelihood of the named individual and his or her company. Potential restrictions may include:

  • a suspension of all operations of the licensee;
  • a refusal of the AER to consider any application made under the OGCA or the Pipeline Act;
  • a requirement of the submission of abandonment and reclamation deposits (as much as a 25% penalty on the amount owed); and
  • an obligation to disclose any corporation the individual has control over.

These consequences can extend to any corporation that the individual directly or indirectly controls.

Protection of the public and deterrence are key factors the AER considers when assessing the public interest in issuing a declaration.

The AER and its predecessors have used their powers under Section 106 with discretion and applied it only in the most egregious circumstances. Still, the AER has recently said that it may use this power. 10 In the current economic Circumstances, the AER might attempt to apply it more frequently.

It is our understanding that one of the reasons the AER has used this power sparingly is to avoid deterring individuals from becoming, and remaining directors and officers. Not only would a Section 106 Declaration hamper a company's ability to conduct operations, but it would also destroy the livelihood of the person named. The AER has not imposed Section 106 Declarations on otherwise compliant companies when facing financial difficulties. Without a flagrant disregard for the AER, the legislation, guidelines and policies, a Section 106 Declaration will not likely issue against a director or officer.

Personal Liability under Other Statutes Unlikely

Other pieces of provincial legislation, some of which are listed below, may result in personal liability for directors and officers. Once again, while the potential of personal liability exists under these pieces of legislation, there is a low probability of liability being imposed.

  • The Water Act11 addresses the use of water in energy development, namely, hydraulic fracturing. Personal liability can arise in the same manner as under s. 232 of the EPEA.
  • The Pipeline Act12 contains a provision very similar to Section 106 of the OCGA In particular, where a licensee contravenes an order of the AER or has an outstanding debt to the AER, the AER may make a declaration against a director, officer or agent that was directly or indirectly in control of the licensee at the time. The potential restrictions are very similar to that under a Section 106 Declaration. In addition, an individual can be guilty of an offence if he or she causes any officer, agent or employee of any holder of an approval or license to contravene Section 52(1) of the Pipeline Act. During the prosecution, an individual may present a due diligence defense similar to that under the OGCA. If found guilty, an individual is liable to a fine of not more than $50,000.
  • The Mines and Minerals Act13 which provides that an individual an officer, director or agent' of the corporation who authorized or acquiesced in or participated in the commission of the offence by a corporation under the Mines and Minerals Act, is guilty of the offence and liable to punishment.

Federal legislation similarly prohibits: non-permitted discharges of substances, provides for penalties relating to the failure to communicate, and in certain circumstances, can provide for director/officer liability where a corporation commits an offence. Fines can be imposed. For example, under the Fisheries Act,14 directors and officers can be liable where a corporation commits an offence, subject to a due diligence defense. While many operations are not -regulated- on a federal level, there is a level of overlap as, for example, the Fisheries Act regulates -all waters in the fishing zones of Canada, all waters in the territorial sea of Canada and all internal waters of Canada".

Conclusion

Based on the broadly worded provincial legislation, personal liability for directors and officers has been a possible result of non-compliant events, although rare for the reasons discussed. The current economic and commodities environments have led to more and larger regulatory and financial defaults than in the past. Further, some recent insolvency proceedings that have dealt only with profitable oil and gas assets, have left companies with no way to ensure the safe management of remaining assets. Finally, the significant financial strain on the Orphan Well Fund and of the Provincial budget means that there is a new awareness of the magnitude of problems with suspension, abandonment and remediation of wells and facilities. As such, the AER could consider seeking personal liability of directors and officers. We think that is unlikely. Still, maintaining good corporate governance, organizational structure and reporting by directors and officers through these times is the best insurance.

Footnotes

1. RSA 2000, c E-12 [EPEA)

2. RSA 2000, c 0-6 [OGCA)

3. £PEA, S 232

4. See for example: EPO-2013106-CR

5. Currie v Ontario (Ministry of the Environment), (2011) OERTD No 26 (Ont. ERT); ERT Case Nos 10-050/10-051/10-052

6. Baker v Ontario (Ministry of the Environment), 2008 Carswell Ont 11332 (ant ERT); ERT Case Nos 12-158 to 12-169

7. Especially in light of Re Redwater Energy Corporation, 2016 ABQ.B 278 (which is under appeal)

8. Note that the , RSA 2000, c 0-7 is the principal legislation applicable to the development of oil sands development and production in Alberta. It is analogous to the OGCA.

9. OCGA, s. 108(1) and (2)

10. See AER Bulletin 2016-10 (April 8, 2016).

11. RSA 2000, c W-3

12. RSA 2000, c P-15

13. RSA 2000, c M-17

14. RSC, 1985, c F-14, s 78.2

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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