In a decision released today, the Court of Appeal for Ontario set aside a damages award made against Vale (formerly Inco Limited) in one of the largest-ever environmental class actions in Canada and awarded Vale $100,000 in costs for the appeal.

BACKGROUND

The appeal in Smith v. Inco Limited, 2011 ONCA 628 (not yet available on CanLii) stemmed from a judgment rendered after a three-month common issues trial in which Justice Henderson of the Superior Court of Justice held that the class had suffered a diminution in the value of their residential properties resulting from elevated levels of nickel in the soil and ordered Vale (Inco Ltd. was acquired by Vale in 2007) to pay an aggregate damage award of $36 million to a class comprised of over 7,000 homeowners whose properties in Port Colborne, Ontario are very close to the Vale refinery. (Click here to access the blog post on Justice Henderson’s decision).

Vale appealed Justice Henderson’s finding that it was liable in private nuisance and under strict liability imposed by the rule set down in Rylands v. Fletcher as well as His Honour’s finding that the claimants had established a diminution in the value of their properties and his assumption that the diminution was caused by the discharge of nickel particles onto the land.  Finally, Vale asked the Court to consider whether the trial judge had erred in finding that the class members’ claims were not time barred under section 45(1)(g) of the Limitations Act.  

THE COURT OF APPEAL DECISION

In analyzing the trial decision, the Court of Appeal noted that it was important to emphasize the exact nature of the claim advanced at trial – it was not about contamination in the sense that it was alleged that the nickel emissions posed a threat to human health or otherwise adversely affected the claimants’ use of their properties, but rather that the claimants’ property values had not increased at the same rate as comparable property values in other small cities located nearby and that this was caused by widespread public health concerns over the nickel deposits in the soil on their properties.

 Liability in private nuisance

In overturning the trial judge’s finding that Vale was liable in private nuisance, the Court of Appeal focused on the claimants’ argument that the nickel particles caused “physical injury” to their property by becoming part of the soil and the “subsequent adverse effect” of a decrease in the value of property. 

The Court held that it was an error for the trial judge to find that the nickel particles in the soil caused actual, substantial, physical damage to the claimants’ lands because the claimants could not, nor did they attempt to, show that the nickel particles in the soil had any impact on their ability to use their properties for any purpose.   “In our view, a mere chemical alteration in the content of soil, without more, does not amount to physical harm or damage to the property.”  The Court continued, “[t]o constitute physical harm or damage, 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 land.” 

The Court said that it was not enough to show evidence that the existence of the nickel particles in the soil generated concerns about potential health risks because that did not amount to evidence that the presence of the particles caused actual, substantial harm or damage to the property.  Had the claimants’ shown that the nickel levels in the properties posed a risk to health, they would have established that those particles caused actual, substantial and physical damage to their properties.  However, the claims advanced were not predicated on any actual risk to health or wellbeing arising from the particles in the soil and the claim, as framed, could not succeed.

Liability under Rylands v. Fletcher

The rule in Rylands v. Fletcher imposes strict liability for damages caused to a plaintiff’s property by the escape from the defendant’s property of a substance “likely to cause mischief.”  In examining both the rule and the trial judge’s decision, the Court of Appeal held that it did not accept that strict liability based exclusively on the “extra hazardous” nature of the defendant’s conduct is or should be part of the common law in this province, and that even if it were the refinery was not shown to be an extra or “ultra hazardous” activity.   The Court stated:

Inco operated a refinery on its property.  The nickel emissions were part and parcel of that refinery operation and were not in any sense an independent use of the property.  The use of the property to which the Rylands v. Fletcher inquiry must be directed is its use as a refinery.  The nickel emissions are a feature or facet of the use of the property as a refinery.  The question must be – was the operation of the refinery at the time and place and in the manner that it was operated a non-natural use of Inco’s property?

The trial judge had found that Inco’s use of the property was non-natural because it brought nickel on to the property.  However, the Court of Appeal stated:

If the characterization of a use as a non-natural one was ever tied solely to whether the substance was found naturally on the property, it has long since ceased to depend on the answer to that single question.  It may be that something found naturally on the property cannot attract liability under Rylands v. Fletcher.  It is not, however, the law that anything that is not found naturally on the property can be subject to strict liability under Rylands v. Fletcher if it escapes and causes damage.

After a lengthy analysis of the rule and its application, the Court of Appeal held that the claimants did not discharge their onus of showing that the operation of the refinery was a non-natural use of the property and that they had not demonstrated that Inco’s operation of its refinery for over 60 years presented “an exceptionally dangerous or mischievous thing” or that the circumstances were “extraordinary or unusual.” The Court held that this failure on the part of the claimants was sufficient to find in Inco’s (Vale’s) favour on this ground of appeal.

Causation and the Limitation Period

Having ultimately held that the appeal must be allowed and the action dismissed as a result of the claimants’ failure to establish liability under either private nuisance or the rule in Rylands v. Fletcher, or alternatively, and assuming the elements of either or both causes of action were made out, the claimants’ failure to establish any damages, the Court held that it needed not address the causation issue or the limitation period argument. 

However, because the trial judge’s analysis of the applicability of the limitation period had potential application to other class action claims in which limitation period defences are raised, the Court of Appeal found it prudent to examine his findings. 

At paragraph 111 of the trial decision, Justice Henderson said

Prior to1990, I find that most property owners would not have been aware, and ought not to have been aware, of the fact that nickel in the soil could affect the value of their properties.  Thus, the court must determine when the class knew or ought to have known that nickel in the soil could affect the values of their properties.

The trial judge had rejected Vale’s argument that the claim was barred by the expiry of the relevant limitation period on the basis that it was well known prior to the fall of 2000 that here was a problem with nickel soil contamination in the area.

The Court of Appeal commented, 

Assuming the trial judge properly framed the question for the purpose of the Limitations Act analysis, his finding that “most property owners” would not have been aware of the potential effect of the nickel implicitly constitutes a finding that some would have been aware of the potential effect of the nickel. 

The Court went on to hold that class actions are procedural vehicles and if, as the trial judge found, the evidence didn’t establish that all of the class members were aware of and ought not to have been aware of the material facts, then the application of the Limitations Act to the claims was an individual and not a common issue.  The Court found, “it was an error to treat the limitation period as running from the date when a majority, even an overwhelming majority, of the class members knew or ought to have known the material facts in issue.”