Canada: Court Overturns C$36-Million Damages Award in Environmental Class Action

Copyright 2011, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Environmental/Class Actions, October 2011

Introduction

In a unanimous judgment, the Ontario Court of Appeal has overturned a decision which had awarded members of an environmental class action C$36-million against Inco Limited (now Vale) for contamination arising from authorized historic industrial activity.

The Ontario Court of Appeal's decision in Smith v. Inco Limited, released on Friday, October 7, 2011, clarifies the legal requirements for claims of nuisance and strict liability, and the appropriate method of analysis for a limitation period for a class of plaintiffs.

This judgment is particularly noteworthy given that Smith v. Inco Limited was one of the first class actions in Canada to go to a full common-issues trial.

Background

Inco Limited had operated a nickel refinery in Port Colborne, Ontario, a town of approximately 18,000 residents on the north shore of Lake Erie, from 1918 until 1984. The class action against Inco Limited was launched in March 2001 following the release of an Ontario Ministry of the Environment phytotoxicological study which disclosed that nickel contamination existed in the soil in certain parts of Port Colborne, Ontario. The claimants alleged that the public disclosure of the nickel-soil contamination in 2000 precipitated public concern of the potential health effects of the nickel deposits, and that this negatively affected the value of their property. They further alleged that, as Inco was the source of the nickel contamination, it was liable for the diminution in value of their property.

On July 6, 2010, after a four-month trial, the Ontario Superior Court of Justice found Inco Limited liable for the class members' decreased property values on the basis of the torts of strict liability under the rule in Rylands v. Fletcher and private nuisance. The court also concluded that the claims against Inco Limited were not statute barred by the Limitations Act, finding that the cause of action against Inco Limited arose in February 15, 2000, after a meeting of real estate board members in the Port Colborne area determined that it was appropriate to put a warning concerning nickel contamination in all contracts to purchase homes in the area. The lower court rejected Inco Limited's arguments that a cause of action – if any – arose in 1984 when the refinery was closed, and awarded C$36-million in damages to the claimants, based on hotly contested expert evidence.

The lower court's decision, particularly the award of such significant damages stemming from operations that had ceased almost a quarter of a century before trial, prompted considerable discussion among those in both the environmental community and the class-action bar. For an in-depth explanation of the Ontario Superior Court's trial level decision and the facts of the case, please see our July 2010 Blakes Bulletin on the subject.

Ontario Court of Appeal's decision

The Court of Appeal allowed Inco Limited's appeal and dismissed the action. It was found that the claimants had not in fact established Inco Limited's liability under either private nuisance or strict liability, and that, moreover, even if such claims had been established, the claimants had failed to establish any loss or damage. Though not necessary to dispose of the appeal, the Court of Appeal also offered its analysis of the applicable limitation period, with the express recognition that such an important issue has potential application to other class action claims in which limitation period defences are raised.

Private Nuisance

The Court of Appeal determined that the private nuisance claim should not have succeeded at trial. The trial judge had accepted that the deposit of nickel particles, which have become part of the soil, amounted to physical damage to the claimants' properties, and that such physical damage was "material" (a requisite element of a private nuisance claim) as it had negatively affected the values of the claimants' properties.

The Court of Appeal clarified that private nuisance requires actual, substantial, physical damage to the land be established, which meant – in the context of the case at hand – that the nickel levels must be found to pose at least some risk to the health or wellbeing of the residents of the properties. The damage need not be visible to the naked eye, but the physical damage alleged must be more than "a mere chemical alteration to the content of the soil, without more". The Court of Appeal found that the claimants had not shown that there had been any physical damage that had some detrimental effect on the land or the rights associated with use of the land: evidence that the existence of nickel particles in the soil generated "concerns" about "potential" health risks simply did not suffice. The Court of Appeal was clear that the tort of private nuisance was not one that could be based on mere concerns, but rather one that should be based on actual, material injury.

Strict Liability Under the Rule in Rylands v. Fletcher

The Court of Appeal also held that the claim for damages for strict liability should not have succeeded at trial. Under the rule in Rylands v. Fletcher, strict liability is imposed for damage caused by the escape from one party's property to another's of a substance likely to cause mischief.

Typically, in a case based on Rylands v. Fletcher:

• the defendant must be shown to have made a non-natural use of this land
• the defendant must have brought something onto the land that was likely to do mischief in the event of an escape
• the substance at issue must have actually escaped
• damage must have been caused to the plaintiff's property.

As summarized by the Court of Appeal, the trial judge's imposition of liability on Inco Limited under strict liability was based on the rationale that "an entity who chooses to engage in potentially hazardous activity assumes the risk of any damages caused by that activity."

The Court of Appeal flatly rejected the notion that strict liability can be based solely on the "extra hazardous" nature of a defendant's conduct. Such a theory of liability would impose strict liability for damages that are the result of intended consequences of an activity, whereas the rule in Rylands v. Fletcher imposes strict liability for the unintended consequences of a mishap. Under the current law, strict liability is not imposed simply because an activity carried out was abnormally hazardous. In any event, the Court of Appeal also found that there was no evidence to suggest that Inco Limited's refinery operations or emissions should be considered extra hazardous.

Ultimately, the Court of Appeal held that the claimants did not meet their burden of establishing that the refinery operation was a non-natural use of Inco Limited's property, the essential first element of a Rylands v. Fletcher test. It is worth noting that when evaluating whether the operation of the refinery was a "non natural use" of the land, the Court of Appeal stated that while compliance with environmental and zoning regulations was not a defence to a claim under Rylands v. Fletcher, such compliance is a consideration in determining whether a use is non-natural in the sense that it is not ordinary.

Damages

Although not necessary to the resolution of the appeal, the Court of Appeal went on to consider the damages awarded as it was concerned with the methodology used by the trial judge. The Court of Appeal noted that even if Inco Limited's liability under either private nuisance or strict liability had been established, the claimants failed to prove damages, and the trial judge had made errors in principle when analyzing the claimants' claim for damages. The claimants alleged that their properties had not appreciated as other comparable properties had, with reference to data sets comparing property values in Port Colborne and Welland, Ontario. The Court of Appeal held that the claimants had in fact suffered no demonstrable loss. The various problems with the trial judge's determination that the claimants had suffered damages included that:

• the data sets had not been properly corrected for logical and consistent statistical comparison
• the claimants' experts had made no effort to determine what other factors may have affected the property values in Port Colborne
• the trial judge had conducted arbitrary calculations, without evidentiary foundation.

The Limitations Issue

Finally, although again not necessary to dispose of the appeal, the Court of Appeal made the effort to comment on – and correct - the trial judge's Limitations Act analysis. In considering when the limitations period should begin to run with respect to the claim against Inco Limited, the trial judge had noted that "most" property owners would not have been aware of the potential effects of the nickel soil deposits until 2000, and therefore the limitations period did not begin to run until February 15, 2000 (following the meeting of real estate board members) for the entire class of claimants. The Court of Appeal took issue with this finding, as some members of the class, as admitted by the trial judge, would have been aware of the potential effect of the nickel deposits. Unless all class members had been unaware of the material facts of a potential claim until such a date, the application of the Limitations Act was not a common issue as between the class members. Consequently, the trial judge erred in holding that the limitations period begins to run when the majority of a class knew or ought to have known the material facts.

Conclusion

The Court of Appeal's decision makes significant clarifications to the law of private nuisance and strict liability under Rylands v. Fletcher, two torts often found in environmental litigation. With respect to strict liability, the Court of Appeal acknowledged that there are policy rationales for the imposition of strict liability for activities which create "extra hazardous" risks, but ultimately declined to impose such liability by way of "judicial fiat", in the absence of legislative prompting.

The clarifications offered by the Court of Appeal concerning damages and limitations period are also instructive. First, this case offers a reminder that the Court of Appeal will not hesitate to interfere with a trial judge's evidentiary findings when they are based on flawed statistical analysis and arbitrary calculations. Second, limitations periods in class actions will defeat a claim unless all class action claimants did not know or ought not to have known the material facts of the claim. The Court of Appeal has now provided clear direction that the limitations issue will not necessarily be considered a common issue.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.