Personal Liability

In today’s competitive business environment, directors and officers are expected to drive the financial success of their companies while adhering to the highest standards of business conduct. In so doing, directors and officers can attract potential personal liability for wrongful conduct. One aspect of management that is attracting greater scrutiny is decision-making within the context of companies’ environmental performance.

The environmental liability of directors and officers can arise in two ways: (i) violations of environmental laws; and (ii) civil claims for environmental incidents that cause damage to property or harm to individuals. It is generally understood that directors and officers are subject to potential liability for the remediation of contaminated sites under the broad sweep of environmental legislation, particularly where they have had management of or control over contaminants, or where they have made decisions that resulted in contamination.

Consider the recent Ontario case, Baker et al. v. Director, Ministry of the Environment, which raised more than a few eyebrows when former directors and officers of Northstar Aerospace, Inc. and its parent company were held personally liable by Ontario’s Ministry of the Environment (MOE) for contamination located at the site of the now-insolvent company’s former facility in Cambridge, Ontario. While Baker was settled before the MOE’s position could be tested before Ontario’s Environmental Review Tribunal (ERT) or the courts, it signals the willingness of regulators to seek out all potentially responsible parties to recover the costs of remediation where a company is no longer able to continue financing remediation activities, even where the directors and officers did not cause or were not involved in the decision-making that led to the contamination. This article will also consider strategies to help mitigate environmental liability as directors and officers carry out their corporate duties. 

OVERVIEW OF THE BAKER CASE

Northstar operated a facility for manufacturing and processing aircraft parts at the site from 1981 to 2009. The company’s operations resulted in trichloroethylene contamination, which migrated from the site to nearby residential properties.

Northstar commenced voluntary remediation in 2005, but although the future costs of site remediation were estimated to be in the millions of dollars, no funding was set aside by the company for the work.

When Northstar began having financial difficulties in March 2012, MOE issued a remedial order to secure the continued performance of remediation work. Following the sale of substantially all of Northstar’s operating assets (other than the site) in July 2012, no personnel or resources were left to continue the remediation work. On the basis of human health concerns, the ministry stepped in the following month to continue remediation work at the site.

In October 2012, MOE issued a remediation order against certain individuals who were directors and officers of Northstar from 2004 to 2012. The ministry claimed that these individuals had management and control of site remediation. The directors and officers in question appealed the order to the ERT, claiming they would suffer irreparable harm if the order was not stayed since they would incur remediation costs of approximately $1.4 million per year.

The group was unable to recover any costs from the insurance policy intended to indemnify former Northstar directors and officers as the policy excluded the costs of environmental remediation.

In its appeal, the directors and officers claimed a range of defences, including that some of them were not on the board during the time of the contamination and had no specific responsibility for environmental matters. MOE argued that the directors had allowed the company to file for protection under the federal Companies’ Creditor Arrangement Act and stop remediation activities at the site, which made them responsible for remediation under Ontario’s Environmental Protection Act (EPA).

A stay was not granted and the former directors and officers were ordered to immediately pay for the continuation of the necessary remediation work until any appeal process was completed. This resulted in the group having to pay approximately $800,000 out of their own pockets for the completion of interim remediation work.

Subsequently, the former Northstar directors and officers reached a settlement with MOE and agreed to pay about $4.75 million to MOE in exchange for the withdrawal of the order.

UNCERTAINTY PREVAILS

Since a settlement was reached by the parties before the Baker appeal could be heard, it is uncertain whether or not the facts of the case would have supported MOE’s assertion that Northstar’s former directors and officers were personally liable for the remediation of the site, even where they did not cause or were not involved in the decision-making that led to the contamination.

If the MOE had been successful in arguing its case, this would have expanded the liability of directors and officers beyond the scope established in the ERT’s June 2011 ruling, Currie v. Director, Ministry of the Environment.

That decision, where the directors of a former corporate owner of a contaminated site were ordered to remediate the site, even though the property had been subsequently purchased by a new party, confirmed that the MOE’s power to issue orders under the EPA extends to all corporate directors – both former and current – provided that such directors had a sufficient degree of management or control of the property.

In Currie, the ERT reiterated the 1995 ruling of the Ontario Environmental Appeal Board in Caltex Petroleum Inc. v. Ontario (Ministry of Environment and Energy) that (i) the onus is on directors to present evidence of their lack of involvement if they wish to avoid being subject to an EPA order, and (ii) the presumption of a director’s management and control of corporate affairs can only be rebutted by a “very convincing case.”

It is too early to tell whether or not other provincial regulators will follow the MOE’s approach in Baker. However, the case serves as a cautionary tale that regulators may expect directors and officers to personally cover interim remediation costs pending the outcome of any regulatory or court proceedings.

A possible implication of this case is that regulators may require increased security in the permitting process to ensure that regulatory authorities have adequate funds for contingent and future environmental obligations.

MANAGING ENVIRONMENTAL LIABILITY IN A COMPETITIVE BUSINESS ENVIRONMENT

In order to attract high-calibre candidates to boardrooms, companies will need to ensure that directors and officers are sufficiently protected from personal liability. For individuals who currently serve on boards or are considering taking up a board position, the Baker case offers some lessons on how to mitigate the risks of environmental liability not only for directors and officers, but also for companies:

• Ensure sufficient protection for directors and officers in indemnity agreements. Directors and officers are typically indemnified against costs incurred as a result of any civil, criminal, administrative or other proceeding arising from the individual’s association with the company.

• Review directors’ and officers’ insurance policies to determine the scope and limits of any coverage for environmental claims. There is no standard wording for environmental coverage, so care should be taken in reviewing individual policies.

• Establish a fund to cover potential environmental remediation costs, particularly where the company engages in higher-risk activities, such as manufacturing or natural resource extraction.

In addition, the following actions can help directors and officers meet their due diligence obligations and reduce the likelihood of environmental incidents and related claim s against the company:

• Review decisions and actions taken by management in response to environmental incidents.

• Maintain appropriate records to demonstrate that directors and officers have been diligent in performing their duties and overseeing the operations of the company.

• Ensure the company has robust environmental policies and environmental incident response plans in place.

• Regularly consult with the company’s environmental managers to address any issues of concern and ensure that issues are reported to senior management in a timely way.

• Ensure that employees are aware of their responsibilities to comply with requirements under environmental legislation (e.g. spill reporting obligations).

• Ensure that environmental audits are carried out at regular intervals.

Following Baker, it is more important than ever for directors and officers to proactively manage environmental issues with the objective of minimizing their risk exposure in the face of constantly evolving environmental liabilities.