Windfalls and legal costs: Victory Motors clarifies contaminated sites cost recovery in British Columbia

British Columbia’s contaminated sites cost recovery regime under the Environmental Management Act (EMA) is based on a simple premise – “polluter pays” – that has proven complicated to implement. The EMA casts a wide net to catch an array of “responsible persons” connected to a contaminated site, including previous site owners and operators, then provides the courts with broad discretion to allocate retroactive liability for remediation costs between those responsible persons based on certain criteria. The question of how the courts should exercise that discretion has been the subject of much litigation.

In Victory Motors (Abbotsford) Ltd. v. Actton Super-Save Gas Stations Ltd.¹,  the British Columbia Court of Appeal clarified two discrete cost allocation issues. First, it confirmed courts should not increase the relative liability of a current owner simply because it was a polluter that benefitted from a remediation, absent evidence of a “windfall.” Second, it explained that remediation-related legal costs (as opposed to litigation costs) could be fully recovered as a remediation cost to the extent that they are “reasonably incurred.”

Background

This case concerned two contaminated sites owned by the appellants, one by Victory Motors and the other by Jansen. The respondent, Super-Save, was one of several historical operators of the gas station on the Victory Motors site. Both sites were contaminated by gas that leaked from the gas station’s storage tanks. Early in the remediation, the principals of Jansen Industries purchased the shares of Victory Motors, paying what Super-Save would later argue was a bargain price, while also indemnifying the former Victory Motors shareholder against future environmental claims. Both Jansen and Victory Motors then remediated their properties and sought to recover their remediation costs from other responsible persons, including Super-Save. 

For further discussion of the background facts and the trial judge’s ruling regarding stigma damages, please see our previous update on the issue here. 

Allocation and windfall benefits

When allocating liability under the EMA, the Contaminated Sites Regulation requires the court to consider several factors, including “the price paid for the property by the person seeking cost recovery” (s. 35(2)(a)) and “other factors relevant to a fair and just allocation” (s. 35(2)(f)). 

At trial, Super-Save argued based on s. 35(2)(a) that Victory Motors should not be able to recover its remediation costs while also enjoying an increase in property value following Jansen’s principals’ advantageous purchase of the contaminated property. The trial judge rejected this for two reasons: first, Jansen did not purchase the property but rather the company – the property was always held by Victory Motors; and, second, Super-Save had not proven that the value of the Victory Motors property increased by an amount beyond the cost of remediation. 

Yet the trial judge nonetheless “consider[ed] it relevant that Victory Motors [received] the benefit of the remediation costs while being a significant contributor to the contamination” and, relying on s. 35(2)(f), increased the allocation of liability to Victory Motors. 

The Court of Appeal found that the trial judge erred in taking this latter step and overturned his decision on this point. In its view, increasing a current owner’s liability because it obtains the benefit of a remediation would be contrary to the EMA’s intent, because it would discourage remediation.² Moreover, because the trial judge found that neither Victory Motors nor Jansen had obtained a windfall benefit if proper corporate distinctions were maintained, this shifting of liability could “only be seen as an effort to claw back a portion of the alleged windfall enjoyed by the purchaser of the Victory Motors shares at a bargain price.” In doing so, the trial judge had inappropriately exercised his discretion to do indirectly that which he was not permitted to do directly. 

This decision does not preclude future defendants from arguing that a current site owner should face increased liability to prevent an unfair windfall. To date, however, such arguments have failed several times, in large part due to the difficulty of proving a remediated property’s value has increased in excess of remediation costs due to the remediation rather than extraneous factors such as changes in market conditions. 

Following this decision, such a defence will be especially difficult where the alleged windfall is a discounted share purchase price for a company that owns contaminated property, rather than a discounted purchase price for the contaminated property itself. Conversely, for anyone considering purchasing contaminated property with the intent to recover remediation costs, this decision highlights the importance of properly structuring the transaction to prevent the risk that some or all of the costs are shifted to the purchaser.  

Legal costs as remediation costs

The Court of Appeal also clarified that remediation-related legal costs are recoverable as a “cost of remediation,” an issue that was confused in previous case law. This issue is significant to cost recovery claims, since effective site remediation can require extensive legal services. Remediation-related legal costs should be assessed by the trial judge on a proper evidentiary basis and may be fully recovered to the extent they were “reasonably incurred.” The court specifically enumerated the following legal services that could qualify as remediation related:

• Advising the remediating client; 
• Negotiating with governmental authorities; 
• Navigating the client through creating an acceptable remediation plan;
• Advice on proper execution of the remediation plan; 
• Advice on obtaining final regulatory approval; 
• Legal services engaged in investigating other responsible persons; 
• Negotiations with other responsible persons; and
• Drafting and preparing agreements for joint remediation and cost sharing. 

These costs are distinguishable from the legal costs incurred when litigating a party’s claim for recovery of remediation costs, which are to be assessed in the usual manner under the court’s tariff. 

Practically, since a plaintiff will be required to lead evidence on these costs to establish its claim, the court recommended that parties actively distinguish between the two categories of costs, including with distinct files and time-keeping protocols, to prevent a potential waiver of privilege over the party’s litigation file.