Canada: Superior Court Of Justice Dismisses Third Party Action For Professional Negligence Arising From The Purchase Of Contaminated Land

The Superior Court of Justice recently granted a motion to dismiss a third party claim for professional negligence in a proceeding involving the purchase of a contaminated property that was subject to a remediation order registered on title (the "Contaminated Property").

CN Railway Company v. Crosslink Bridge Corp., 2018 ONSC 5475 ("CN Railway") arose from an action by the plaintiff vendor, CN Railway, against the defendant purchasers, Crosslink Bridge Corp. and its two directors ("Defendants"). The action related to the Defendants' default on a vendor take-back mortgage and various personal guarantees and indemnities relating to the sale of the Contaminated Property. The Defendants initiated a third party action against their solicitors from two different law firms (the "Third Party Solicitors") whom the Defendants had retained at separate stages of the real estate transaction. The Defendants alleged that the Third Party Solicitors had a duty to warn the Defendants of the environmental risks associated with purchasing the Contaminated Property (the "Third Party Claim"). The Defendants sought damages equal to the costs associated with the purchase of the Contaminated Property. The Third Party Solicitors brought a motion for summary judgment to dismiss the third party claim on the basis that their respective retainers did not give rise to a duty to warn in the unique circumstances.

The Superior Court granted the Third Party Solicitors' motion for summary judgement and dismissed the Third Party Claim. In addition to concluding that the Third Party Claim was statute barred, the Court found that the Defendants' retainers with each of the Third Party Solicitors demonstrated that the Defendants did not rely on the Third Party Solicitors in deciding to accept the environmental risks associated with purchasing the Property. The Court reasoned that none of the Third Party Solicitors had been given information or instructions to determine the scope of the cost of remediating the Property.

The First Law Firm

The first law firm was retained by the Defendants to represent it in a proposed purchase of the Contaminated Property. The first law firm conducted a title search of the Contaminated Property and reviewed and commented on a template agreement provided by the Defendants. The First Law firm also cautioned the Defendants that the issue of environmental due diligence required further discussion.

The evidence indicated, however, that the Defendants never provided the vendor's disclosure documents to the first law firm. According to the evidence, one of the Defendant directors was sophisticated in real estate and land development matters, and the Defendants engaged in direct discussion with the vendor without the knowledge of the first law firm. The Court found no evidence that the Defendants had ever authorized the first law firm to take any steps to measure the environmental risks associated with the transaction, and the Defendants never provided the first law firm with a draft of the final agreement of purchase and sale. According to the Court, the first law firm was never consulted or asked to advise on the provisions of the final agreement of purchase and sale. Moreover, the Defendants' retainer with the first law firm ended before the drafting or execution of the final agreement of purchase and sale.

According to the Court, without access to crucial information and instructions, a duty to warn could not be imposed on the first law firm. The Court found and the first law firm had fulfilled its duty to advise of the encumbrance relating to environmental issues and the need to review all permitted encumbrances prior to executing an agreement of purchase and sale.

The Second Law Firm

The Defendants retained the second law firm to close the transaction. According to the evidence, the Defendants' retainer with the second law firm was restricted to closing an already executed agreement, as the Defendants had already agreed to purchase the contaminated property on an "As Is" basis prior to retaining the second law firm. The Defendants sought no advice from the second law firm concerning environmental issues and made no mention of any environmental concerns during the retainer process. Moreover, when the second law firm discovered the remediation order that was registered on title, the Defendants specifically instructed the second law firm not to obtain a copy of the order. The Court found that the second law firm had no retainer to investigate, measure, or define the risk associated with purchasing the Contaminated Property.

Conclusion

CN Railway Company demonstrates that the duty to warn of a particular environmental risk will not be imposed on a lawyer if the client does not provide the lawyer with the tools and instructions to enable the lawyer to take steps to measure and define the scope of the risk. In the context of purchasing contaminated property, these tools and instructions include providing the lawyer with the environmental due diligence, and taking the lawyer's advice to follow up on environmental issues. This case also emphasizes that a solicitor's negligence will be assessed with reference to the form and nature of the client's instructions, the specificity of those instructions, the nature of the retainer, and the sophistication of the client.

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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