Illustrating the adage that an indemnity is only as good as the person giving it, a recent case from the Ontario Environmental Review Tribunal demonstrates the serious exposures a vendor may encounter when contaminated property is sold subject to a contractual indemnity without adequate security.

In Superior Fine Papers Inc. v. Director, Ministry of the Environment [2011] O.E.R.T.D. No. 22, the vendor had entered into an agreement to sell a paper manufacturing site with known environmental issues. The business was sold as a going concern, but the transaction was structured so that the vendor paid the purchaser $4.5 million to acquire the site and assume all but a specified number of obligations. This assumption of liability was duly documented in an Environmental Indemnity. The purchaser took the money, failed to clean up the site, and subsequently went into receivership. Along came a new buyer, who paid for the property and even assumed the obligations of the Indemnity, but who also failed to complete the clean-up claiming lack of funds. The MOE issued an order naming the original vendor, the first purchaser (who did not appeal), and the impecunious buyer.

In a decision accompanied by lengthy reasons, the Tribunal considered the jurisdictional and fairness arguments put forward by the parties, and upheld the order with some modifications. With respect to the original vendor, who would be put in the position of paying for the clean-up twice, the Tribunal found that the fact that the vendor had paid another party to remediate the site did not relieve the vendor of its statutory liability exposure as a prior owner and operator of the site, observing that the vendor had failed to secure the performance of the remediation when it knew, or ought to have known of its own continuing statutory liability exposure.