Real Estate Developer Recovers 90% Clean-up Costs From Previous Owners, in Action Under B.C. Environmental Legislation

Just last week the British Columbia Supreme Court released a decision which orders a previous owner/operator of a polluted property in Downtown Vancouver to pay 90% of the clean-up costs incurred by the current owner in redeveloping such contaminated site.

In Workshop Holdings v. CAE Machinery, the Court both:

• enforced the cost recovery provisions of the Environmental Management Act (EMA or the Act), and
   

• in the process, resolved a number of liability issues in favour of the plaintiff current owner/developer, and therefore against the previous owner/operator that polluted the property.

The Workshop case did not, however, consider insurance coverage for such long tail liability risks, including the so-called absolute pollution exclusion under standard CGL policy wordings.

Enforcing EMA Cost Recovery Provisions

EMA was formerly known as the Waste Management Act. Background information on the Act can be found in two previous articles, titled "Dirty Real Estate in B.C.: A Primer on Environmental Liability and Insurance Coverage", Part I and Part II, on Clark Wilson's website.

Simply put, although the Act has been in force since 1997, in more or less its present form, the practical effect of the legislation has been largely unclear. This is because only a handful of cases have considered the Act, and, specifically, interpreted its provisions for private cost recovery actions against previous owners/operators of polluted property. That lack of clarity has included, in particular, the respective rights and obligations of present owners and previous owners/operators, when formerly industrial property is redeveloped and contamination of the site cleaned up - quite a common occurrence in Canadian cites today.

Workshop is the first case to squarely address those latter issues, and comes down firmly on the side of current owner/developers, and against previous owners/operators of polluted property.

Resolving Liability Issues in Favour of Current Owner/Developers (and against Reimbursing Pollution Clean-Up Costs)

The B.C. Supreme Court considered the following issues in Workshop:

• was the site contaminated?
• was CAE a “responsible person” under the Act?
• were Workshop, its principals or others also responsible persons?
• was the amount of Workshop’s claim excessive?
• was Workshop’s action barred by the 30-year ultimate limitation period?

Before discussing those issues, however, a brief description of the facts in the case is appropriate.

In 1919, a company called Canadian Sumner Ironworks (“Canadian Sumner”) was incorporated. In 1924, Canadian Sumner purchased two lots, and leased the other two, located at 1216-1224 West Pender Street, in what is now downtown Vancouver. Until 1949, Canadian Sumner operated an iron works and brass foundry on the property.

Business directories indicated that a company called Ace Welders had occupied the property in 1945, and a trucking company had operated there in the 1950s.

In 1964, Canadian Sumner changed its name to CAE Sumner, and in 1965, to CAE Machinery.

In 1960, Annar Klokstad bought the property, and in 1964, he demolished the old foundry and built a warehouse. Before erecting that building, he used some of the contaminated foundry soil as fill, spreading it around the property.

Between 1964 and 1996, Mr. Klokstad leased the property to various tenants, including an auto paint and repair operation and a scrap metal dealer.

In 1996, Mr. Klokstad died, and the property passed to his wife. In 1997, the Klokstads son, Eric, incorporated Workshop for the purpose of redeveloping the property. His mother remained on title, as a bare trustee, and became a shareholder of Workshop. The company obtained to the right to develop and operate the property, and plans were made to stratify the property, and build a 43 unit commercial building, complete with an underground parkade.

In 1997, Workshop retained an environmental consultant, which undertook both a preliminary and a detailed site investigation, and subsequently developed a remediation plan and obtained an approval in principle from the Province to proceed with the development. During its investigations, the consultant identified zinc and copper as soil contaminants on the property, as well as the chemical ‘signature’ of foundry sand. Zinc and copper are the constituent elements of brass, Canadian Sumner having operated a brass and iron foundry on the site.

When the underground parkade was excavated, the contaminated soils were required to be disposed of at designated landfill sites. This is because they did not, for example, meet the WMA/EMA criteria for residential fill.

Workshop therefore sued CAE for those increased fill disposal costs, as well as their consultants’ site investigation costs and related expenses, under the private cost recovery provisions of the Act.

The Issues Decided in the Case:

Was the site contaminated?

CAE’s first line of defence was that Workshop had to establish that the property was a “contaminated site” under the provisions of EMA. The Court made short work of this argument, holding that the consultant’s reports and Province’s approval in principal of their remediation plan provided ample evidence of contamination.

Was CAE a “responsible person” under the Act?

Second, CAE challenged the admissibility of corporate records put into evidence by Workshop, which connected CAE to Canadian Sumner. The Court rejected this argument too, relying as well on Land Title searches indicating Canadian Sumner’s previous ownership, and an affidavit by a former employee of Canadian Sumner/CAE.

Were Workshop, its principals or others also responsible persons?

Third, CAE argued that, even if it was liable, then the clean-up costs should be shared by Workshop itself, as well as the Klokstads and/or previous tenants of the property.

Regarding Workshop, and its principals the Klokstads, CAE argued that, as “owners” of a “contaminated site”, and therefore also ‘responsible persons’ under the Act (see Part I article), Workshop was itself also jointly and severally liable for the clean-up costs. As such, any judgment against CAE should be reduced by apportioning some of the same to Workshop.

The Court dealt with that argument in two ways. One, it said that just because the Klokstads may have known about the previous use of the property - for the operation of a foundry - does not mean they knew or suspected that the site was contaminated by copper and zinc in concentrations exceeding those permitted under the Act. As such, the Klokstads and Workshop were protected from “owner” liability by the ‘innocent acquisition’ provisions (section 26.6(1)(d)) of EMA.

Two, the Court held that the Klokstads and Workshop had not contributed to the contamination of the site by spreading foundry soil around the property as fill, before building the warehouse. The Court pointed out that the key to liability, under section 26.5 of the Act, is the introduction of contaminants onto a site, and that Workshop and the Klokstads had not introduced any new contaminants, but merely redistributed existing soil around the property.

As for liability of others, the Court held that CAE’s argument that previous tenants had contaminated the property by their auto paint and repair, and scrap metal operations, were purely speculative and simply not supported by any evidence.

Was the amount of Workshop’s claim excessive?

Fourth, CAE argued that not all of the approximately $117,000 in costs claimed by Workshop were attributable to cleaning up the polluted property.

The Court considered all of the consultants’ invoices, as well as soil testing and borehole drilling costs and soil disposal costs paid to the two landfill operators and a trucking company. Relatively minor amounts were held to be more properly attributed to removal of an underground storage tank and sump pump, glass and brick debris, and asbestos, as opposed to the contaminated soil.

However, the Court held that the amount claimed was generally reasonable, and ordered CAE to pay Workshop approximately $106,000 in damages; about 90% of the amount claimed.

Was Workshop’s action barred by the 30-year ‘ultimate limitation period’?

Finally, CAE relied on section 8(1) of the Limitation Act, which provides that an action may not be brought “after the expiration of 30 years from the date on which the right to do so arose.”

The simple answer to this was that Workshop’s claim was based on the private cost recovery provisions of WMA/EMA, which created an entirely new cause of action, and did not come into force until the 1990s. Therefore, Workshop’s cause of action did not arise until that time, when less than a third of the ‘ultimate limitation period’ had passed by the time it commenced proceedings against CAE.

Other Issues (Including Liability Insurance Coverage):

The Workshop case does not answer all of the many questions surrounding private cost recovery claims under the Act. Among those are, of course issues involving ‘long tail’ liability coverage for previous owner/operators like Canadian Sumner/CAE. That is, the duty to defend - if not also indemnify for - such claims, notwithstanding the so-called “absolute pollution exclusion” in standard CGL policy wordings.

Coverage issues are dealt with, in a summary way, in the article “Dirty Real Estate in B.C.: Part II, mentioned above. They are also considered, in much more detail, in a comprehensive paper on Clark Wilson’s website, "Environmental Liability and Insurance Coverage in B.C.: A Primer on Contaminated Sites and Clean-Up Cost Recovery Litigation". That paper also includes a detailed discussion of the B.C. Act, as well as tort liability for environmental contamination, across Canada.

All in all, Workshop is good news for real estate developers seeking to recover their costs attributable to cleaning up contaminated sites. But it could be bad news for insurers, when they are called upon to defend such claims.

Readers with questions concerning this or other insurance-related topics are welcome to contact Neo Tuytel ( phone: 604-643-3180; email: njt@cwilson.com or Jon Hodes (604-643-3168; email: jlh@cwilson.com).