On October 7, 2011, the Ontario Court of Appeal released its decision in Ellen Smith v. Inco Limited, an appeal brought by Inco from a trial court decision which had found against it in a class action. This is a landmark decision for environmental litigation.

The trial judge found that soil on the properties of the class members contained nickel particles emitted from Inco’s nickel refinery in Port Colborne over a six year period prior to 1985. The trial court held that beginning in 2000 concerns about the levels of nickel in the soil caused wide-spread public concern and adversely affected appreciation in the value of the properties of the class after September 30, 2000. The trial court held that Inco was liable in private nuisance and under the strict liability principle set down in the leading case of Rylands v. Fletcher. The trial judge fixed damages in the amount of $36 million.

The Ontario Court of Appeal allowed Inco’s appeal, reversed the trial court decision, and dismissed the action. The Court of Appeal held that the claimants had failed to establish Inco’s liability under either private nuisance or the strict liability rule in Rylands v. Fletcher. It also held, in the alternative, that the claimants had failed to establish any damages.

The Court of Appeal noted that the refinery had closed in 1984. It was not alleged that Inco operated the refinery unlawfully or negligently, and indeed it was admitted that Inco complied with all environmental and other governmental regulatory schemes applicable to the refinery.

The claim was made against Inco in relation to the environmental impacts of its operations not while it was operating and not during the period in which its nickel emissions were obviously occurring, but rather well after the refinery was closed. The claimants alleged that the damages occurred as a result of public awareness of the nickel contamination of their properties in 2000. Since then, they alleged their property values had not increased at the same rate as comparable property values in other small cities located nearby.

The claim as advanced did not claim nuisance based on alleged health effects from the nickel emissions. The claimants argued that the deposit of nickel onto their lands caused physical damage to the land, the resulting concerns affected property values, and hence the nuisance. However, the Court of Appeal found that mere chemical alteration in the content of the soil, without more, does not amount to the physical harm or damage to the property necessary for a nuisance claim. It held that a change in the chemical composition must be shown to have had some detrimental effect on the land itself or rights associated with the use of the land. The Court of Appeal found this test had not been met. There was therefore no nuisance. It held:

“Evidence that the existence of the nickel particles in the soil generated concerns about potential health risks does not, in our view, amount to evidence that the presence of the particles in the soil caused actual, substantial harm or damage to the property. The claimants failed to establish actual, substantial, physical damage to their properties as a result of the nickel particles becoming part of the soil without actual, substantial, physical harm, the nuisance claim as framed by the claimants could not succeed.”

The Court of Appeal also held that the claimants had not established a case against Inco based upon the strict liability rule in Rylands v. Fletcher. It noted that the rule has been given various interpretations since it was first promulgated as a basis for strict liability. It was established to apply in the circumstance where there was an escape from a defendant’s property of a substance “likely to cause mischief” as a result of a “non-natural use” of the property. As the Court of Appeal notes, later cases used words like “special”, “unusual” or “extraordinary” to describe the use of the defendant’s property.

The trial court judge had found that since Inco brought nickel onto its land, the refining of the nickel constituted a non-natural use of the land; Inco had brought something onto its property that was likely to cause mischief if it escaped. The trial judge had found that the emissions of nickel particles from the property constituted such an escape in the context of a non-natural property use.

The Court of Appeal rejected this analysis. It concluded that the strict liability principle applies not for “all risks associated with carrying out an activity but rather with risks associated with the accidental and unintended consequences of engaging in an activity”. The Court of Appeal also held that the strict liability principle applies having regard to whether the use of the property is inappropriate to the place as opposed to the one on which an ultra-hazardous activity is taking place.

The Court of Appeal found that Inco’s use of the property was not a “non-natural use” of the land. While nickel was not naturally occurring on the property, the fact that nickel was brought onto the property does not automatically trigger the strict liability principle under Rylands v. Fletcher if it escapes and causes damage.

“To decide whether use is a non-natural one, the court must have regard to the place where the use is made, the time when the use is made, and the manner of the use. Planning, legislation and other government regulations controlling where, when and how activities can be carried out, will be relevant considerations in assessing whether a particular use is a non-natural use in the sense that it is a use that is not ordinary.”

The Court notes that Inco’s refinery was operated in a heavily industrialized part of the City in a manner that was ordinary and usual and did not create risks beyond those incidental to industrial operations. As a result, the Court of Appeal concludes that the claimants failed to establish that Inco’s operation was a non-natural use of its property.

The Court of Appeal also comments that it doubted the appropriateness of the application of the Rylands v. Fletcher rule to the intended consequence of an activity that is carried out in a reasonable manner in accordance with all applicable rules and regulations, as opposed to imposing strict liability for mishaps that occur in the course of the conduct of an unnatural or unusual activity.

Having concluded that the trial judge had erred in finding Inco liable under either the private nuisance principles or the rule in Rylands v. Fletcher, the Court of Appeal embarked upon an analysis of the claimants’ damages claim, and found that damages not to have been proven. The question before the court was: “Did the disclosure from and after September 2000 of information concerning nickel contamination in the Rodney Street area and elsewhere in Port Colborne negatively affect property values in the Port Colborne area?” The Court of Appeal concluded that it did not.

The Court of Appeal also addressed an issue concerning the application of the Limitations Act to the class proceeding. The trial judge had found that “most property owners would not have been aware of the fact that nickel in the soil could affect the value of their properties prior to 1990.” He therefore allowed all claimants to proceed in the class action. The Court of Appeal held that in doing so, he erred. The Court of Appeal held that discoverability is an individual issue to require individual adjudication. The limitation period does not run “from the date when the majority, even an overwhelming majority of the class members, knew or ought to have known of the material facts in issue”; it has to be applied to the knowledge or discoverability circumstances of each individual claim.

This decision is an important one. It is a significant analysis of the principles of nuisance and the strict liability principle of Rylands v. Fletcher. Moreover, it applies those principles in the modern context of industrial activity, a context in which hazardous materials, and potentially contaminating chemicals and substances, are regularly and commonly in use. The decision gives important guidance with respect to the application of these long-standing common law tort principles to modern industrial settings, including those which occur in proximity to residential land use. It should be of significant comfort to industry operating in compliance with land use approvals as well as environmental statutes, regulations and permits. This case sets the sets the bar high for those contemplating environmental class actions against industry in Ontario.