Innocent Purchaser Liable for Environmental Cleanup Costs 


December 2007 - (Business in Vancouver entitled )

This article appeared in Business in Vancouver entitled, "Court rules on cleanup costs"
The Supreme Court of British Columbia undertook its first comprehensive allocation of responsibility for cleanup costs among 'responsible persons' under the Environmental Management Act (British Columbia) in the recent case of Gehring v. Chevron Canada Limited.Its decision has far-reaching implications and, for the passive owners of a property in Salmon Arm, it proved to be a costly lesson in the need to exercise reasonable diligence in investigating environmental risks when purchasing property. 

Under the Act, any 'responsible person' can be held liable for the costs of cleaning up a contaminated property. The trap for the unwary lies in the fact that one does not actually have to cause or contribute to the contamination in order to be a 'responsible person' – merely owning, leasing or occupying property may be sufficient. In Gehring, the court allocated a shocking 50% of the cleanup costs to passive owners of the property who did not contribute to the contamination. The remaining 50% of costs were allocated to a gas bar that had been operated on the property. With respect to the costs owed by the passive owners, 25% were allocated to the owner who had removed the contaminating system, but failed to fully remediate the contamination, and the remaining 25% were billed to the subsequent owner, who had bought the property with no prior knowledge of the contamination or the fact that the property had been used as a gas bar.
Interestingly, no liability was attributed to Chevron as the sole producer, supplier and transporter of the gas that caused the contamination because they did not have sufficient control of the activities that actually led to the contamination (i.e. use of leaky storage tanks, valves and piping). Also, no remediation costs were allocated against former directors of dissolved companies, despite the fact that those companies were found to have contributed to a significant amount of the site contamination. 

Key Implications

Owner and Operator Structure: There are very practical implications arising from the finding that dissolved companies and their directors will have no further liability. For example, companies might consider whether properties should be acquired, owned and operated by single-purpose companies that are dissolved once a contaminated property has been sold. Implementing an appropriate corporate structure is not simply a matter of avoiding the consequences of one's own wrongful acts. It is important to recognize that, under the Environmental Management Act, an owner or other 'responsible person' can be liable for cleanup costs for pre-existing contamination, contamination that occurs while they are the owner, including that caused by lessees, and for contamination that migrates to the site from neighbouring properties. 

Director Liability: Directors should be especially conscious of liability for contamination under the expanded definitions of 'owner' and 'operator' which include the directors of a corporation that is an owner or operator. According to Gehring, a director may be included in the definition of 'owner' or 'operator' where they were essentially passive participants or merely 'acquiesced' to the activity that gave rise to the contamination. If you agree to act as a director of any company that owns or may become the owner of property, it is incumbent to be proactive and to exercise appropriate diligence in discharging your responsibilities. 

Due diligence:Caveat emptor – buyer beware. Thorough and timely due diligence is required to minimize or avoid liability for environmental contamination, even when an owner or operator is not aware of contamination and does not contribute to the contamination. If you chose to purchase property without making reasonable inquiries to determine the nature and extent of any contamination, your failure to do so may be a basis upon which you can be held personally liable for its contaminated state even if you did not cause or contribute to the contamination. The purchaser of a property has an obligation to make appropriate inquiries regarding its environmental condition otherwise the consequences can be potentially devastating. 

Agreement of Purchase and Sale: Purchasers in real estate transactions must pay particularly close attention to the terms of the purchase and sale agreement in relation to the allocation of responsibility for contamination and for remediation costs.

This article, essentially in this format, appeared in the December 4-10 2007 issue of Business in Vancouver.