Directors and Officers Beware: Recent Ontario Decision Further Extends Responsibility for Environmental Issues
Environmental Law Bulletin
Tuesday, 25 October 2011
Corporate directors and officers may be held personally liable under the Ontario Environmental Protection Act (“EPA”) for wrongdoings of the corporation unless they are able to provide substantial evidence that they were not involved in management of the corporation. The recent decision of the Ontario Environmental Review Tribunal (the “Tribunal”) in Currie v. Director (Ministry of the Environment) (“Currie”), reinforces earlier decisions indicating that directors will be held to a high standard of presumed awareness about, and responsibility for, environmental problems, regardless of whether the director has a sophisticated understanding of the operations of the business.
History of Ministry Involvement
The property that caught the attention of the Ministry of the Environment (the “Ministry”) in Currie was a former resin production facility. Between 1989 and 2010, Ministry officers attended the site several times noting numerous violations of the EPA. These violations largely related to the presence of unidentified chemical waste in unsecured and sometimes leaking containers, as well as the resulting contamination of waterways.
The facility ceased operations in the early 1990s but no one removed the chemicals from the site or cleaned it up. Throughout the 1990s, the Ministry met with directors numerous times in an effort to address these matters. A number of remedial orders were issued during this time. Some of the violations were addressed, however, others remained unresolved. In 1998 the facility was leased and ownership was ultimately transferred to another company in 2006.
The Order under appeal was issued in 2010 and directed to the original corporate owner, its current and former directors, as well as the current corporate property owner and its directors. It required each of the corporate and individual parties to clean up the site. Only the current and former directors of the original owner appealed the Order.
Presumption of Directors’ Liability
Section 18 of the EPA enables the Ministry to issue remedial orders to current and former owners, as well as anyone who is or was in management or control of the undertaking or property. The Ministry argued that the directors were all responsible by virtue of this section. The Tribunal, relying on a 1995 decision (Caltex Petroleum Inc. v. Ontario), held that the onus is on directors to present evidence of their lack of involvement if they wish to avoid being subject to an order. This is because there is a strong presumption that the individuals identified as officers and directors in corporate documents were intended to have, and in fact do have, management and control of the business; and this presumption can only be rebutted by “a very convincing case”.
In concluding that the directors had management and control of the site between 1989 and 1998, the Tribunal considered that:
Although the Tribunal found the directors were only in management and control of the site between 1989 and 1998, and not in the twelve year period leading up to the Order issued in 2010, they were still found liable for the present day environmental issues. This was because the environmental issues that were created during the time they had management and control of the site persisted to the present day. As such, the Tribunal concluded that the Ministry had jurisdiction to issue the Order to the former directors. The Tribunal stated: “Under section 18 of the EPA, the fact the property was sold to a third party does not relieve of responsibility the parties that managed and controlled the very risks that were created when they were in charge of the Site”.
The Ontario Business Corporations Act Offers Little Protection
The Tribunal was also asked to consider section 135 of the Ontario Business Corporations Act (the “BCA”), which relieves a director of liability if he or she exercised the care, diligence and skill that a reasonably prudent person would have exercised in comparable circumstances, including reliance in good faith on the advice of an officer. On this point, the Tribunal concluded that:
"It is not clear to the Tribunal if section 135 of the BCA is relevant to this matter, and in particular, with respect to section 18 of the EPA. In any event, the Tribunal is not convinced that [the director in this case] has exercised the required “care, diligence and skill” when dealing with the environmental issues during the time 815 owned the property. Further, [the director] had not presented evidence of what advice he relied upon and to what extent in order to take advantage of the relief given in section 135 of the BCA. It is clear that he knew, or ought to have been aware, that there were environmental issues at the site.... It would seem that some diligence would have been required [sic] that the environmental issues at the Site were addressed."
As a result, the Tribunal was unwilling to rely on the BCA to absolve the directors of liability for environmental matters.
The directors also argued that even if they were in management and control of the site, it would not be fair for the Ministry to hold them responsible because, among other reasons, so much time had passed since their involvement with the property. Relying on the 2010 Tribunal decision of Kawartha Lakes (City) v. Ontario (Ministry of the Environment), in which an innocent owner of contaminated property was ordered to clean it up when no other potentially responsible parties had the financial means, the Tribunal held that the primary consideration of the Tribunal must be the furthering of the purposes of EPA:
"the Tribunal must ask whether the fundamental purpose of the EPA will be served if the Appellants are removed from the Director's Order.... Pointing fingers at other Orderees or potential orderees does not further the principles enunciated in Kawartha Lakes (2010) or the MOE Compliance Policy. It also undermines the “Polluter Pays” principle."
Ultimately, the Tribunal concluded, “[t]hose who manage or control undertakings must be responsible for the cost of pollution” and refused to release the directors from the Order on the basis of fairness.
Repercussions for Directors and Limiting Exposure
This decision is in keeping with a recent series of Tribunal decisions that have shown an increasing willingness to hold directors personally liable for corporate omission in addressing environmental problems. Many directors will be familiar with the BCA standard of conduct, which allows them to rely in good faith on the actions or recommendations of officers or other directors. In the case of environmental matters, however, directors who are not involved in the day-to-day operations of a business should be aware that they may not be able to rely on the assumed diligence of other corporate representatives to protect them from personal liability or their own limited involvement in the company. This decision indicates that directors will not only be found liable for failing to ensure known environmental problems were addressed, but for failing to act in situations where the Tribunal determines a director ought to have been aware of a problem simply as a result of his or her position.
Given the difficulty in establishing an absence of management and control, the only way to successfully avoid liability for a management and control type order may be to prevent the occurrence of the environmental issue in the first place. Failing that, inclusive indemnity agreements and insurance policies covering claims for environmental matters, can provide some financial protection. Ideally, these would cover claims that might arise after one is no longer a director.