Courts Examine Parent Corporations' Liability - International Law Office

Liability of American Parent Corporations
Overlapping Statutes
New Substances Regulation

Liability of American Parent Corporations

The liability of American parent corporations under Canadian environmental law for the actions or inaction of their Canadian subsidiaries was recently examined in United Canadian Malt Ltd v Outboard Marine Corporation of Canada Ltd, 48 OR (3rd) 252.

United Canadian Malt (UCM) commenced an action against Outboard Marine Corporation of Canada (OMCC) for damages arising out of contamination alleged to be migrating onto the UCM property from property owned by OMCC. UCM claimed that the solvents and petroleum hydrocarbons migrating from the OMCC property had adversely affected the groundwater used by UCM in its malt processing. The action was also brought against the American parent corporation of OMCC, Outboard Marine Corporation, as well as the current and former directors of the Canadian company and the American parent.

The American parent and the directors and officers sought to have the claim against them struck out. They were largely unsuccessful.

UCM claimed that the individual directors knew of the existence of the environmental problem and did nothing to alert UCM of the risks posed to its operation. The court refused to dismiss the claim against the directors.

With respect to the American parent corporation, the court confirmed the two situations to be considered in determining whether or not it is appropriate to disregard the separate legal identity of a corporation. The two situations are: (i) if there is complete domination of the subsidiary by the parent such that the subsidiary does not function independently; or (ii) if there is conduct akin to fraud that would otherwise unjustly deprive claimants of their rights.

Based on the allegations by UCM that the American parent effectively controls the American subsidiary and that the American parent corporation managed, directed and controlled the closure and the clean-up of the property, the court refused to dismiss the claim against the American parent corporation. The court went on to note that the claim could be brought directly against the American parent corporation, independent of any issue as to whether or not there should be a 'piercing of the corporate veil', if it could be established that:

"the American parent corporation voluntarily assumed responsibility for the contamination problem, that could give the plaintiff the basis for a direct claim against it for damages suffered by the plaintiff through the failure of the American parent corporation to properly remedy the problem."

This case confirms the liability in principle of American parent corporations for the polluting actions of their Canadian subsidiaries.

Overlapping Statutes

A recent decision of the Ontario Court of Appeal confirms that one incidence of discharging a substance could give rise to liability under both environmental laws and occupational health and safety laws.

In R v Dow Chemical Canada Inc, 47R (3rd) 577, the Ontario Court of Appeal found that the Ontario Environmental Protection Act (EPA) applied to a discharge of a contaminant into the natural environment that adversely affected only a worker in his workplace.

There was no dispute that chlorine was discharged into the natural environment from the chemical manufacturing complex operated by Dow. However, the evidence showed that the release of chlorine was so small that all but one employee could not detect it. One worker was blinded and choked by the release, and became disoriented, stumbled and fell, suffering a limited number of injuries. No charges were laid under the Occupational Health and Safety Act (OHSA). However, Dow was charged under the EPA for having discharged the contaminant that caused or was likely to cause an adverse affect.

On appeal of the trial decision, Dow's conviction was overturned on the basis of a distinction between a direct and consequential effect. The judge on appeal was of the view that the EPA dealt with "the adverse affect resulting from or consequential to the pollution or impairment of the natural environment". The judge ruled that there was no offence under the EPA.

The Ontario Court of Appeal disagreed. In providing its reasoning, the Court of Appeal also clarified the relationship between the EPA and the OHSA.

Despite the fact that both pieces of legislation contain 'paramountcy' provisions which provide that in the event of a conflict with another piece of legislation, each piece of legislation governs, the court accepted the fact that there will be an overlap and that the overlap is entirely permissible.

"The purpose of the EPA is to protect the natural environment and the people who live, work and play in it. The purpose of the OHSA is to protect work sites and workers. Incidences occur which implicate both statutes."

The court rejected the distinction being made by Dow between an onsite and offsite effect.

"The paramountcy provisions in the EPA and the OHSA do not assist Dow. They are relevant when there is a conflict between statutes. There is no conflict between the EPA and OHSA. There is an overlap, perhaps even duplication. But overlap and duplication are different from conflict."

As a result, the court held that both laws will apply. The court recognized that the interpretation of the interplay between the EPA and the OHSA may create some uncertainty for companies. The court acknowledged that the onsite/offsite distinction has merit for the purposes of ease of application, but nonetheless, the companies would have to exercise their judgment when faced with an incident that might implicate both the EPA and the OHSA.

This case is important for two reasons: (i) it confirms that a single incident may give rise to liability under both environmental statutes and occupational health and safety statutes; and (ii) it indicates that an offence under the EPA may occur even where the discharge into the natural environment is onsite and does not otherwise migrate offsite.

The end result of the case is that the companies will be required to assess each event of discharge and ensure that there is full compliance under both environmental statutes and occupational health and safety laws.

New Substances Regulation

The Canadian Environmental Protection Act provides a legislative framework for creating a comprehensive legislative scheme to control 'new substances'. The legislative scheme prohibits the manufacture or importation of a substance, or the commencement of a 'significant new activity' until notification is provided. The substance must be properly assessed to determine whether or not it poses a risk to the natural environment or human health and safety. The requirements for notice are specified in the New Substance Notification Regulations.

Despite the fact that the regulations have been in place since 1994, enforcement was limited. The first conviction under the regulations was on January 21 2000 against Akzo Novel Chemicals Ltd.

Despite Environment Canada's limited enforcement capacity, companies would be well advised to ensure that all substances are evaluated in order to determine whether they are 'new substances', thereby requiring notification and assessment.

For further information on this topic please contact Harry Dahme at Gowling Lafleur & Henderson by telephone (+1 416 862 4300) or by fax (+1 416 862 7661) or by e-mail (harry.dahme@gowlings.com).

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