Proceed with caution: The risk of ineffective environmental indemnities

7 minute read
17 December 2019


Environmental indemnities must cover all applicable operations and project lifecycle phases. Otherwise, as highlighted in a recent decision by the Supreme Court of Canada (SCC), even a carefully drafted indemnity can be rendered null and of no effect.

In R v Resolute FP Canada Inc., 2019 SCC 60, the SCC considered the scope of an indemnity held by forest-product companies Resolute and Weyerhaeuser. Each of these companies had a previous connection with the Dryden pulp and paper mill in northern Ontario (Weyerhaeuser had held title to the mill's waste disposal site from 1998 to 2000, and Resolute's predecessor (Great Lakes) was a previous owner).

Toxic Mercury Contamination

The Dryden mill operation included a chlor-alkali plant (used to bleach paper) that released untreated mercury waste into the English and Wabigoon Rivers in the 1960s. This release caused extensive harm, including to local residents (such as Grassy Narrows and Islington First Nations' members in downstream reserves), the commercial fishery, and the region's tourism industry.

This damage led to litigation by the First Nations against the companies, which resulted in settlement discussions intended to both address the environmental contamination and keep the mill operational in order to maintain local employment. Part of the remediation efforts included the construction of a waste disposal site in 1971 to bury mercury-contaminated waste from the chlor-alkali plant.

The 1985 Indemnity

One aspect of the litigation and settlement was the resulting indemnities given by the Government of Ontario to the companies' predecessors in title. At issue in the recent SCC case was the third of three indemnities, which was signed in 1985.

Indemnities are common contractual tools for managing risks, and are often broadly worded to provide indemnification from a wide range of possible sources of liability. This case was no exception, with broad wording incorporated in the 1985 indemnity to include indemnification for any claims, damage, loss, event or circumstance with respect to the discharge, escape or presence of a pollutant from or in the lands and premises forming the mill site.

Testing the Indemnity

In 2011, the Ontario Ministry of the Environment issued a Director's Order to Weyerhaeuser and Resolute's predecessor. The Order required the companies to repair waste disposal site erosion, engage in specified monitoring and reporting practices, deliver financial assurance to the Ministry, and take all additional reasonable measures to ensure any discharge from the site was prevented.

In response, the companies appealed the Order, seeking a declaration that the 1985 indemnity required Ontario to compensate the companies for complying with the Order. The case continued through the Superior Court and Court of Appeal, and finally made its way before the SCC.

The Pollution Solution

At the SCC, the majority relied heavily on Justice Laskin's dissenting opinion at the Court of Appeal. Key to its finding was the characterization of operations and activities that were covered by the 1985 indemnity. In particular, the court observed that the indemnity only pertained to pollution claims; accordingly, sources of pollution would fall within the scope of the indemnity.

In this instance, however, the Director's Order pertained to the waste disposal site associated with the mill. As a remediation activity, the court concluded that this was not a source of pollution (i.e., within the scope of the 1985 indemnity, being a pollution claim), but rather a solution of pollution. A solution of pollution, in the majority's opinion, could not be the basis for a pollution claim - accordingly, the court held that the solution (i.e., the waste disposal site) fell outside the scope of the 1985 indemnity.

Purpose of the Settlement

In rendering its decision, the court also observed that the 1985 indemnity was attached to the litigation settlement agreement. That settlement was limited to the historic discharge of pollutants into the rivers from the Dryden mill, and the continued presence of such pollutants in the ecosystem. As the waste disposal site:

  1. served only to contain mercury,
  2. was not directly related to the mill's previous discharge into the river systems, and
  3. showed no evidence of mercury-contaminated waste discharging from it,

the court concluded that the 1985 indemnity did not apply to contamination associated with the waste disposal site, and the companies could therefore not rely on the indemnity for the purposes of the Director's Order.

Successive Indemnities

Finally, the majority of the court also held that the 1985 indemnity must be considered in the context of the two released indemnities entered into between the parties prior to the 1985 indemnity.

Ontario provided the first indemnity in 1979 to facilitate the sale of the Dryden mill to Great Lakes, limiting the liability of the parties resulting from environmental damage prior to the sale to $15 million. In exchange, Great Lakes agreed to spend approximately $200 million on expansion and modernization of the Dryden facilities.

In 1982, Great Lakes obtained a second indemnity from Ontario covering any damages awarded by a court or any settlement above $15 million. Great Lakes agreed to release the 1979 and 1982 indemnities in exchange for the 1985 indemnity pursuant to the litigation settlement agreement.

The court relied on the narrower scope of the prior indemnities to support its finding that none of the indemnities were intended to provide protection against the costs of regulatory compliance, and that the indemnities were intended to only protect against claims brought by third parties.

We can help...

This decision highlights the importance of careful drafting of contractual terms that seek to limit a party's potential liability for environmental risks. There are two critical points that it illustrates in respect of the drafting of indemnities specifically:

  • Drafters must turn their minds to the full panoply of potential liabilities in the future, and ensure that the indemnity is scoped appropriately in light of such possible scope; and
  • Given the finding that the two prior indemnities could be used to help interpret the subsequent 1985 indemnity at issue in this case, it is essential that drafters turn their minds to whether there are additional risks covered by the current indemnity that were not addressed in past, and include specific language saying as much.

Gowling WLG has extensive experience drafting strong and enforceable indemnities, limitations of liabilities, and other contractual terms that protect parties and allow them to their manage risks in the long-term. Please contact one of our experienced professionals if you would like to discuss means to manage your risks - both today, and into future.

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