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Types of liability
What types of liability can arise for environmental damage (eg, administrative, civil, criminal)?
Environmental damage can create regulatory liability and civil liability in Canada.
Environmental regulators may impose requirements to investigate and repair damage through the issuance of environmental orders of various types. This almost always occurs at the provincial level. Some provinces have created an administrative monetary penalty regime whereby an order is issued in relation to environmental damage and the orderee must pay a monetary penalty rather than undertake remediation of the damage.
Provincial environmental regulators may also impose liability through the prosecution of those violating environmental statutes. This liability is considered to be quasi-criminal. Penalties can include imprisonment in extreme cases, but mostly involve fines. The fine structure in most jurisdictions allows fines in the millions of Canadian dollars to be imposed by the courts on conviction. There have been many examples over the past decade of multi-million dollar penalties following convictions for the breach of environmental laws.
Private redress for environmental damage may also be pursued through the civil courts in Canada on the basis of common law causes of action, including:
- strict liability;
- negligence; and
- the infringement of riparian rights.
Directors’ and officers’ liability
Can directors and officers be held personally liable for company environmental offences? If so, can liability be limited through insurance coverage and/or contractual indemnities?
Directors and officers can be held personally liable for their company’s environmental offences in all Canadian jurisdictions. Liability is typically imposed by way of a statutory duty imposed on directors and officers to take all reasonable care to avoid non-compliance. Directors and officers may also be named personally in administrative orders or as defendants in civil actions.
The liability of directors and officers to civil claims is typically limited by insurance. The utility of an insurance policy to cover a director or officer’s exposure to an administrative order or prosecution is a function of the coverage and varies widely. The exposure of directors and officers to prosecution can be mitigated by the implementation at the board level of appropriate procedures that can be used to establish the existence of all reasonable care. This commonly takes the form of the adoption of a formal corporate environmental policy and an environmental management system.
Liability for authorised activity
Can environmental liability arise even in the course of authorised activities (eg, operations subject to environmental permits)?
Environmental liability can arise in the course of authorised activities. Under Canadian law, the defence of statutory authorisation is typically not available to justify non-compliance with a legislative requirement when the activity is otherwise allowed by permit. It is becoming common to see language in permits that requires compliance with legislative requirements.
What defences are available to environmental offenders?
The primary defence is that of due diligence. Under Canadian law, the prosecution must prove the actus reus (ie, guilty act) of the offence beyond a reasonable doubt. The defendant may then try to prove on a balance of probabilities that it took all reasonable care (or due diligence) to prevent the commission of the offence. A second branch of the due diligence defence is the defence of a reasonable mistake of fact. A defendant is entitled to try to prove on a balance of probabilities that it reasonably believed in a mistaken set of facts that, if true, would have resulted in compliance.
Other defences available to environmental offenders include:
- an officially induced error, where the defendant can prove that it relied on incorrect legal advice from a government official;
- an act of God; and
Liability in share sale/asset purchase
What rules govern the transfer of environmental liability in share sales and asset purchases?
In a share sale, the buyer typically inherits all of the seller’s environmental liabilities – both civil and regulatory. In an asset sale, the buyer does not typically inherit any civil liability from the seller, although fact situations do exist where a buyer assumes civil liability for contaminated land. The buyer in an asset sale may become exposed to an environmental order simply by virtue of taking possession of contaminated property. There are a variety of legal mechanisms available to transfer or leave behind environmental liability in any transaction. Other than good indemnities from solid indemnitors, most have no impact on liability associated with an administrative order post-closing.
What environmental due diligence measures are recommended before concluding share sales/asset purchases?
Buyers are typically recommended to:
- review available environmental records;
- search available environmental databases;
- make targeted government enquiries;
- review environmental permits; and
- review any existing environmental studies and reports.
An environmental site assessment is usually recommended. This commences with a phase one assessment to identify any areas of potential environmental concern and continues with a phase two assessment if potentially unacceptable risks are identified. If the target entity is highly regulated, an environmental compliance audit may be recommended. If interior environmental issues are known or identified during due diligence, a building condition assessment may be recommended.
Can lenders be held liable for environmental offences?
It is not typical for lenders to be held liable for environmental contamination, unless the lender has exercised its security interest by taking possession of a contaminated property. Unless it has committed an environmental offence itself, a lender is not prosecuted for any environmental offence committed by its borrower.
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