The Court of Appeal in 0694841 B.C. Ltd. v. Alara Environmental Health and Safety Limited clarified the environmental due diligence requirements when assigning a purchase agreement to another party.
0694841 B.C. Ltd. (“069”) entered into a purchase agreement for commercial property. As part of its due diligence, 069 hired Alara Environmental Health and Safety Limited (Alara) to conduct environmental assessments. Alara found that the property was free from environmental contamination. In its report, Alara included a disclaimer extinguishing itself from liability to third parties if the report was used by any entity, other than 069.
069 then assigned the purchase agreement to International Trade Properties Ltd. (ITC). 069 and ITC were controlled by the same director and sole acting mind. Rather than conducting its own environmental assessment, ITC relied on the report Alara prepared for 069. ITC later discovered contamination on the property and sued Alara for negligent representation. ITC argued that because 069 and ITC were closely related entities, the report was being used for the same purpose and therefore it was entitled to rely on the report.
At trial, the Court found that the disclaimer clause excluded Alara from liability, and ITC should have conducted its own environmental assessment of the property. ITC appealed the decision.
COURT OF APPEAL DECISION
In dismissing the appeal, the Court of Appeal stated that generally, a clear disclaimer clause will extinguish liability to third parties. However, in special circumstances an exception to the general rule can be made. The Court of Appeal found that this situation did not warrant an exception as ITC had the ability to conduct its own environmental assessment but chose not to, and ITC did not obtain consent from Alara before relying on its report. The Court of Appeal clarified that for the purposes of the purchase agreement, ITC was effectively a third party, despite being closely related to 069.
This decision suggests that when a purchase agreement is assigned to a party, the party being assigned the agreement should carefully review any environmental due diligence done by the assigning party to ensure there is not an exclusion clause that would prevent them from relying on the report. If there is such a clause, the receiving party should ensure they conduct their own environmental due diligence. This case makes it clear that closely related entities are no exception to this rule.
This post was co-authored by Nicola Virk, and summer student, Haiger Ye.
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