The importance of drafting strong and enforceable indemnities when seeking to limit a party’s potential liability for environmental risks

On December 6, 2019, the Supreme Court of Canada held two former owners of an Ontario pulp and paper mill liable for the costs of remediating and maintaining a waste disposal site located on the property.

The two former owners, Resolute and Weyerhaeuser, are successors of the companies that abandoned the waste site decades prior. They sought to rely on an indemnity agreement from 1985 between the Government of Ontario and their predecessor companies to argue that they were not responsible for ongoing monitoring and maintenance at the site.

The decision was split 4-3. The majority of the Court found that the indemnity agreement did not protect the companies from the province’s remediation order. As a result, Resolute and Weyerhaeuser, and not the provincial government, were found to be responsible for the cost of compliance. The decision highlights the importance of careful drafting, particularly of contractual terms that seek to limit a party’s potential liability for environmental risks.

History of contamination and indemnity agreements

In the 1960’s, the Dryden pulp and paper mill operators dumped untreated mercury waste from the paper bleaching process into nearby rivers. The mercury waste flowed downstream, which resulted in harm to the health of some local residents, the closure of a commercial fishery and damage to the region’s tourism industry. Many of the affected people were members of the Grassy Narrows and Islington First Nations. In the mid-1970s, the Grassy Narrows and Islington First Nations commenced litigation regarding the mercury contamination.

By the late 1970s, the owner of the mill, Reed Ltd., wanted to sell its Dryden properties. The mill’s prospective purchaser, a company called Great Lakes Forest Products Limited (“Great Lakes”), expressed reluctance to complete the sale due to the contemporaneous litigation with the Grassy Narrows and Islington First Nations. Concerned that the local economy would suffer if the pulp and paper mill closed, the Government of Ontario intervened and, in 1979, entered into an indemnity agreement with the companies. Under the indemnity agreement, the Government of Ontario agreed to limit the combined liability of Great Lakes and Reed Ltd. for any environmental damages caused by Reed Ltd. prior to Great Lakes’ purchase of the Dryden operation. In exchange, Great Lakes agreed to expand and modernize the Dryden facilities.

The Grassy Narrows and Islington First Nation litigation ended with a settlement in 1985. As part of the settlement, the Government of Ontario granted a new 1985 indemnity agreement to Reed Ltd., Great Lakes and their successors and assigns for the mercury contamination. The indemnity provided relief “from and against any obligation … costs or expenses incurred … as a result of any claim, action or proceeding, whether statutory or otherwise … caused by … the discharge or escape or presence of any pollutant …”.

2011 remediation order

On August 25, 2011, Ontario’s Ministry of Environment issued a remediation order for environmental monitoring and maintenance at the waste disposal site. The remediation order imposed three main obligations:

1. to repair certain site erosion, perform specific groundwater and surface water testing, and file annual reports containing specified information;
2. to deliver to the Ministry of Environment the sum of $273,063 as financial assurance in respect of the waste disposal site; and
3. to “take all reasonable measures to ensure that any discharge of a contaminant to the natural environment is prevented and any adverse effect that may result from such a discharge is dealt with according to all legal requirements”.

The property had changed ownership several times prior to 2011, resulting in the remediation order being issued to Weyerhaeuser and Bowater (which later became Resolute).

Lower courts: The Government of Ontario is responsible for the cost of compliance

In May 2013, Weyerhaeuser sought a declaration from the Ontario Supreme Court that the terms of the 1985 indemnity agreement required the Government of Ontario to compensate it for the cost of complying with the remediation order. Resolute intervened. Ontario submitted that it was not responsible for the cost of compliance. All three parties moved for summary judgment.

The motions judge held that the 1985 indemnity agreement applied to the remediation order and granted summary judgment in favour of Resolute and Weyerhaeuser. Ontario appealed.

The Ontario Court of Appeal agreed that the 1985 indemnity agreement applied to the remediation order; however, the Court found that Resolute was not entitled to indemnification as it had assigned its benefit under the agreement.

Supreme Court of Canada: The 1985 indemnity agreement does not cover the cost of compliance

In a 4-3 decision, the Supreme Court of Canada overturned the lower courts and found that the 1985 indemnity agreement did not apply to the remediation order, leaving Resolute and Weyerhaeuser liable for the cost of compliance.

Key to the majority’s decision was the finding that, properly construed, the 1985 indemnity agreement was only intended to cover “pollution claims”. As the obligations in the remediation order related to maintenance and monitoring of the site, it was not a “pollution claim” within the meaning of the indemnity. In coming to this conclusion, the majority held that the 1985 indemnity agreement must be considered in the context of the prior indemnity and the settlement with Grassy Narrows and Islington First Nations. This context indicated that the 1985 indemnity agreement was not intended to provide protection against the costs of regulatory compliance.

Secondary to this was the finding that the 1985 indemnity agreement was intended to cover only pollution claims brought by third parties. First party regulatory claims, such as the remediation order issued by the Government of Ontario (the indemnitor), did not fall within this scope.

Implications

This decision reinforces the importance of drafting strong and enforceable indemnities that seek to limit a party’s potential liability for environmental risks. It serves as a pointed reminder that drafters of indemnity agreements must not only turn their minds to all potential liabilities that may arise in the future, but must also consider the historical context giving rise to the indemnity agreement as such context may be utilized as an interpretive aid.

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