Personal liability to pay damages, including punitive, to a neighbour for environmental contamination: A warning from Midwest

by Natalie Mullins and Kyle Magee

The Court of Appeal's recent decision in Midwest Properties Ltd. v. Thordarson¹ is now the leading authority in Ontario on a number of significant issues in environmental litigation. In this case comment we focus on the Court of Appeal's finding that the principal of the defendant corporation was personally liable for general and punitive damages arising from the contamination of the neighbouring land.

You can read our analysis of Midwest with respect to liability under section 99(2) of the Environmental Protection Act² and the scope of the damages award.

The Facts

Midwest acquired a property in Toronto in 2007. Before purchasing the land, it obtained a Phase I environmental report based largely on a visual inspection of the property. The Phase I report did not recommend that Midwest should conduct more intrusive Phase II investigation of its property.

After purchasing the land, Midwest became interested in acquiring some, or all, of an adjoining property owned by Thorco Contracting Limited ("Thorco"). Thorco was in the business of servicing petroleum handling equipment and was owned and controlled by John Thordarson. As part of its operations, Thorco had been storing waste oils on its property since the early 1970s.

In response to its expression of interest, Mr. Thordarson provided Midwest with environmental reports reviewing the condition of the Thorco property and allowed Midwest permission to access the property for further study. Midwest retained an environmental consultant who soon reported extensive petroleum hydrocarbon ("PHC") contamination on both the Thorco and Midwest properties.

As it turned out, although it had obtained MOE approval to store waste in the early 1980s, Thorco had been storing waste PHCs under improper conditions and far in excess of approved amounts. Over the years, the MOE had issued a number of orders requiring Thorco to remove the excess waste but Thorco had not fully complied with the orders. At trial, Mr. Thordarson's evidence was that he had not fully complied with the orders because he had not found a sufficiently economical way of disposing of the waste. Instead, the defendants stored the waste improperly and it escaped; migrating onto the Midwest land.

At trial, the Court concluded that the defendants were not liable because Midwest had not proven that it had suffered damages. In short, the trial judge's conclusion was that Midwest had acquired a contaminated property and it had not proven that it had suffered damages as a result of the contamination worsening after the purchase.

The Court of Appeal reversed the trial judge's decision on both liability and damages. The Court held that Midwest was entitled to damages under section 99(2) of the EPA. Midwest was awarded the estimated cost to remediate its property, over $1.3 million, against the defendants jointly and severally. In addition, the Court of Appeal found that the defendants' conduct warranted punitive damages and awarded Midwest punitive damages in the amounts of $50,000 against Thorco and $50,000 against Mr. Thordarson.

Mr. Thordarson's Personal Liability

The Court considered Mr. Thordarson's liability under section 99(2) of the EPA. That section establishes a right to compensation from "the owner of the pollutant and the person having control of the pollutant". The Act defines a "person having control of a pollutant" as "the person […] having charge, management or control of a pollutant immediately before the first discharge of the pollutant". The Court made it clear that a person with control of a pollutant cannot rely on the fact that the substance may be owned by someone else in order to shield themselves from liability.

The assessment of whether an individual had sufficient "control of pollutant" so as to be personally liable depends on the factual circumstances of each case. In Midwest, however, Mr. Thordarson was in effective control of the day-to-day operations of the business. In particular, he was responsible for ensuring compliance with the MOE requirements and for storing the PHC on Thorco's property. Accordingly, the Court found that Mr. Thordarson had control of the PHC immediately before its discharge and was liable for the damages caused by its escape.

Similarly, although it did not quantify damages in nuisance and negligence because it would be subsumed in the compensatory damages awarded under the EPA, the Court held that Mr. Thordarson was liable for the contamination based on negligence and nuisance.. While it is trite law that a corporation is legally distinct from its shareholders, officers, directors or employees, there are some exceptions to the general proposition that individuals are protected from personal liability for wrongs caused by corporate acts or acts done in the interest of the corporation. The Court noted that in ADGA Systems International Ltd. v. Valcom³ it had held that employees, officers and directors will be found "personally liable for tortious conduct causing physical injury, property damage or a nuisance even when their actions are pursuant to the duties to the corporation".

In Midwest, the Court held that Mr. Thordarson effectively controlled the operations of Thorco and was "intimately and equally" involved in conduct which was both a nuisance and negligent. Given his involvement in creating and maintaining the contamination, Mr. Thordarson was personally responsible for its consequences.

Finally, the Court found Mr. Thordarson was also personally liable for a $50,000.00 award of punitive damages. Punitive damages are very rarely awarded in civil actions in Canada. In this case, the Court found that punitive damages were warranted given the flagrant breach of the various MOE orders and the Court's conclusion that the defendants demonstrated utter indifference to the environmental condition of the Thorco property and surrounding areas. The punitive damages were awarded with the intent of punishing, deterring and denouncing the conduct of both Mr. Thordarson and Thorco.

Take Away Points

The Midwest decision is a warning for corporate officers, directors, and employees who may be in control of substances that have the potential to cause adverse effects. Prudent individuals will consider the potential consequences of a discharge and take all reasonable steps to prevent a spill. When faced with the discharge of a potential pollutant an individual ought to consider their potential personal liability, even when acting on behalf of a corporation.

Among other things, Midwest emphasizes that an individual does not always have to act beyond the scope of their employment in order to be exposed to personal liability; the question will be whether their individual conduct resulted in physical injuries, property damage or a nuisance. In Midwest, the Court of Appeal clearly embraced the "polluter pays" principle that underlies the EPA and did not accept that Mr. Thordarson could avoid personal liability for contamination by relying on the corporate veil.

Punitive damages like those awarded in Midwest are rare, but not unwarranted in the circumstances of the case. In awarding punitive damages, the Court emphasized the fact that the contamination had persisted for a long period of time and was "clearly driven by profit". The award of punitive damages effectively communicates that the Court is unwilling to condone behaviour, either by companies or individuals, that exhibit a blatant disregard for environmental obligations.