Business comes into contact with environmental law on a daily basis through the plethora of environmental laws and regulations. Avoiding investigations, prosecutions, contamination and media coverage is the best approach, but when they do occur a good "due diligence" defence is often the best response.
Due diligence in the environmental area cannot be set up after the fact. Business has to be thinking in advance about what might occur and how to prevent it. An environmental management system, or steps taken to prevent environmental incidents, will not only stop incidents from occurring but will allow you to deal faster and easier with those that will inevitably occur.
This article looks at due diligence as both a prevention mechanism and as a defence, first in the context of regulatory offences (such as causing pollution) and then in other areas where business and environmental regulation come into contact.
Due Diligence Defined
There are three types of criminal and regulatory offences in Canada: true crimes, absolute liability offences and strict liability offences. True crimes require both a mental element (intention of some kind) and a physical act. Examples are robbery or intentional damage to the environment. The Crown must prove both the intent and the act.
In absolute liability offences committing the act alone renders you guilty. There is no defence once the act is proven. Intention is not relevant. Attempting to prevent the act does not assist in avoiding a conviction.
Strict liability offences fall between the first two categories and were the genesis of due diligence. Strict liability means the Crown only has to prove the act that is prohibited. It does not need to prove intent. However the accused can then avoid a conviction by showing that they acted with due diligence.
In the environmental area, and generally for regulatory offences, due diligence usually means proving that you took all reasonable steps in the circumstances to prevent the commission of the offence.
This article focuses on the "all reasonable steps in the circumstances " meaning of due diligence. But there is a second meaning, not often used and sometimes forgotten: due diligence also means an honestly held but mistaken belief in facts which, if true, would have rendered the act not an offence.
Application: The Ounce of Prevention
To use due diligence as a defence the business must prove, on a balance of probabilities, that it took all reasonable steps in the circumstances to prevent the offence. This has a number of implications.
Proving you took steps to prevent the offence means you have to have taken those steps in advance. Due diligence after the fact, i.e. after the chemicals have spilled and the river is polluted, will not help avoid a conviction, as the act has already occurred. It will help in the clean-up (i.e. acting quickly, calling in help, not trying to hide the incident), and may help you to lower your civil liability (through notification to downstream users not to use the water for livestock or drinking to avoid consequential damage claims) or the penalty a court will impose (i.e. no increased fine for covering up the incident). But it will not help you to avoid the conviction or all civil liability.
Taking steps in advance means applying sound business planning and organization. It means considering the impact your business activities may have on the environment, particularly when the unexpected occurs. It means training your people to prevent environmental incidents. It means following up on your training and systems to ensure they actually work.
All reasonable steps in the circumstances requires an assessment of your business circumstances and what is reasonable in that context. The steps you should take to avoid an incident will depend on the consequences. Potential loss of life or severe human health impacts call for more exhaustive and thorough prevention training, mechanisms and systems. Backup, redundant warning and notification measures are likely beyond reasonable steps where even the worst-case scenario would have virtually no adverse environmental consequences.
Since the onus of proving due diligence is on the accused, businesses that document their prevention systems have a much better chance of successfully using the defence. Training your people is essential to a prevention system. You prove this aspect of your due diligence by showing the court the training manuals or online modules, the records of the employees who went through the training and your follow up steps to ensure the training was used in practice.
More than Just Regulatory Offences
Most environmental and regulatory offences are strict liability, and so due diligence is available as a defence. However application of due diligence does not stop there.
Directors, officers, employees and agents of businesses who commit environmental offences can be personally liable. Where those persons authorized, permitted or acquiesced in the offence by the business, most environmental statutes stipulate that they have also committed the offence, whether or not the business is convicted. Personal due diligence then comes into play and can provide these people with a defence. The typical question is: what did they do to ensure the business did not commit the offence?
Criminal liability now clearly applies to corporations, with amendments to the Criminal Code that came into effect on March 31, 2004. The amendments establish the rules for attributing criminal liability to "organizations" for the acts of their directors, partners, employees, members, agents and contractors. Organizations include not just corporations but also societies, partnerships, trade unions and associations. A corporation will be a party to an offence that requires proof of negligence where its representative is found criminally negligent and a senior officer departs "markedly from the standard of care that, in the circumstances, could reasonably be expected" to prevent the representative from committing the offence. Intentional offences can now apply more broadly under the new s. 22.2 of the Criminal Code.
Due diligence will be a defence in some circumstances. The departure by a senior officer from the standard of care must be "marked". The intentional offence provisions require a senior officer take "all reasonable measures" to stop the representative they know is about to be a party to the offence. In each of these circumstances a due diligence defence will likely apply (although the amendments make no express provision in this regard and arguably, in the criminal context, it should be the Crown not the defence which bears the onus of proof in all aspects). In any event, systems that businesses have in place to prevent careless or reckless acts will be very important. Evidence of training, review and follow-up systems, workplace safety systems and communication will be crucial for businesses to establish that they have not departed "markedly" from the appropriate standard of care.
Due diligence as a prevention mechanism for environmental liabilities also applies in corporate transactions.
Purchasing a business requires consideration of its environmental history. Buying the shares, rather than the assets, also buys all the target company's environmental liabilities. An amalgamation does the same thing. The continuing company will be responsible for the environmental history of both the amalgamating entities. Due diligence here means a thorough understanding of the environmental history of the corporate entities, especially for historical operations no longer associated with the current businesses, and planning for the allocation of those liabilities.
Purchasing property raises similar concerns. Due diligence dictates a thorough historical review of the title and the operations on the site, and in some circumstances on the neighbouring properties. Once you own a property you will become a "responsible person" under the contaminated sites legislation and potentially responsible for environmental clean-up regardless of whether you caused the problem. Knowing the risks and allocating them is a key aspect of corporate due diligence.
Pipes break, people make mistakes, accidents happen, old facilities leak. Due diligence as an approach to business is a method to minimize the number and severity of those inevitable occurrences. Due diligence as a legal defence is a mechanism by which the legal system recognizes that careful people should not be penalized when they have acted reasonably to prevent the consequences of those occurrences.
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.