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Update on Directors’ and Officers’ Environmental Liability: Lessons From Northstar Aerospace

Date

January 22, 2014


The recent Ontario Environmental Review Tribunal (ERT) case of Baker et al. v. Director, Ministry of the Environment (Northstar) raised more than a few eyebrows when former directors and officers of Northstar Aerospace, Inc. (Company) and its parent, Northstar Aerospace (Canada) Inc., were held personally liable by the Ontario Ministry of Environment (MOE) for contamination at the now insolvent Company’s former manufacturing and processing facility in Cambridge, Ontario (Site). The environmental contamination arose from the migration of trichloroethylene from the Site to nearby residential properties, which resulted from the Company’s aircraft parts manufacturing activities at the Site from 1981 to 2009. The Company commenced voluntary remediation of the Site in 2005, but no funding was set aside for the multi-million-dollar remediation work. After the Company began to encounter financial difficulties, the MOE issued a remediation order in March 2012 to secure continued performance of the work. Following the sale of substantially all the Company’s operating assets (other than the Site) in July 2012 under the Companies’ Creditors Arrangement Act (CCAA), no personnel or resources were left to continue the work. Due to human health concerns, the MOE intervened in August 2012 and took over the remediation work.

Once the stay of proceedings under the CCAA expired in October 2012, the MOE issued a remediation order (Order) against certain directors and officers of the Company on the basis that, from 2004 to 2012, they had management and control of the Site and the remediation systems that were in place. The directors and officers appealed the Order to the Ontario ERT, claiming they would suffer irreparable harm if the Order were not stayed as they would have to incur remediation costs of approximately $1.4 million per year (environmental remediation costs were excluded from the directors’ and officers’ insurance policy). The directors and officers claimed a range of defences, including that some of them were not on the board when the contamination occurred and had no specific responsibility for environmental matters. The MOE argued that the directors and officers had allowed the company to file for CCAA protection and stop remediation activities at the Site, which made them responsible for remediation under the Ontario Environmental Protection Act. The ERT did not grant the stay and ordered the former directors and officers to pay immediately for the continuation of the remediation work until any appeal process was completed. As a result, the directors and officers were forced to pay approximately $800,000 out of their own pockets for the completion of interim remediation work. The directors and officers subsequently reached a settlement with the MOE which involved, among other things, the payment of $4.75 million to the MOE in exchange for the withdrawal of the Order.

Under the broad sweep of environmental legislation, directors and officers are potentially liable for the remediation of contaminated sites, particularly where they have had management of or control over contaminants or where they have made decisions that resulted in contamination. In British Columbia, the persons responsible for remediating contaminated sites are set out in section 45(1) of the Environmental Management Act and include current and past owners/operators and persons (a category which includes directors and officers) who caused a substance to be disposed of, handled or treated in a manner that caused a site to become contaminated.

Since a settlement was reached by the parties in Northstar before the appeal could be heard, it is unclear whether the facts would have supported the MOE’s assertion that the former directors and officers were liable for the remediation of the Site. It is also too early to tell whether other provincial regulators (such as the British Columbia Ministry of Environment) will follow the MOE’s lead in expanding the scope of director and officer liability for environmental contamination, especially where a company runs into financial trouble. Northstar does suggest, however, that regulators may seek out all potentially responsible parties to recover remediation costs where a company is no longer able to finance remediation work, even where the directors and officers did not cause or were not involved in the decision-making that led to the contamination.

For individuals who currently serve on boards or are considering taking up a board position, Northstar offers the following lessons to mitigate the risks of environmental liability for directors and officers and their companies:

  • Ensure that the company has robust environmental policies and practices in order to respond effectively to environmental incidents.
  • Ensure sufficient protection for directors and officers in indemnity agreements from the company.
  • Determine whether insurance policies cover environmental remediation liability and, if not, acquire such coverage if the company conducts high-risk activities.
  • Establish a fund or set aside money in a trust that is dedicated to covering potential environmental remediation costs.
  • Report any environmental issues of concern to senior management and regulators, as needed, in a timely manner.

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