Regulatory Affairs: Best Practices For Contractual Allocation Of Environmental Liability Following Resolute FP Canada Inc v Ontario (AG)

• Published date: 16 September 2021
• Subject Matter: Environment, Energy and Natural Resources, Energy Law, Environmental Law, Oil, Gas & Electricity
• Law Firm: Cassels
• Author: Mr Jeremy Barretto, Raivo Uukkivi, Viviana Berkman, Neil Burnside and Viviana Heather

Welcome to our Regulatory Affairs series, developed to provide timely updates on hot topics across the vast world of regulatory law; strategic insights on regulatory fundamentals; and a look at environmental and Aboriginal law topics, which frequently intersect with regulatory matters. As always, we are here to help.

In recent years, remediation costs for contaminated sites have been on the rise. The costs associated with the assessment, remediation and/or monitoring of contaminated sites on federal land was $516.3 million in 2021, an increase of over 70% since 2016.¹ Similarly, estimates for the cleanup cost of oil and gas infrastructure in Alberta range from $58.7 billion to $70 billion.²

In the 2019 decision in Resolute FP Canada Inc v Ontario (AG) (Resolute), the majority of the Supreme Court of Canada declined to enforce a generously drafted indemnity provision on the basis that the factual matrix narrowed the scope of the indemnity.³ This has important implications, because parties often include broadly drafted indemnification provisions in transactions involving the transfer of land or financial arrangements where lands are offered as collateral (Asset-Based Transactions).

The key to success in allocating environmental risk in Asset-Based Transactions is knowledge, from the purchaser's/lender's perspective, and adequate and timely disclosure, from the vendor's/borrower's perspective, with respect to the target assets. Assessing environmental liability is a standard practice, but if the contract terms fail to properly capture the risk allocation, parties may end up undertaking more risk than they had originally anticipated. Drafting these provisions in broad and general terms so as to encompass every possibility of liability may not transfer all of the risk to the vendor/borrower. In Resolute, the Supreme Court refused to apply an indemnity for "any claim, action or proceeding, whether statutory or otherwise" to a first party regulatory order.⁴ Below are three considerations when allocating environmental risk in Asset-Based Transactions.

Conduct Environmental Site Assessments to Confirm Site-Specific Information

The assessment and management of environmental risk in Asset-Based Transactions is not one-size-fits-all. The degree of knowledge that a prospective purchaser should acquire about a target asset as part of the due diligence process will depend on the characteristics of the asset in question, including prior and current uses (which may...