Ontario Court of Appeal Interprets Unclear Inndemnity for Historical Mercury Contamination in Grassy Narrows

Indemnities are a tool for allocating risk. Contracting parties often use indemnities to achieve certainty and finality in their affairs. This requires drafters to be conscious of the assumptions and inferences that a court might draw when interpreting the contract.

A recent Ontario Court of Appeal decision, Weyerhaeuser v. Ontario (Attorney General),[1] highlights the need for clear language to establish air-tight indemnities. The majority focused on the plain and ordinary meaning of the words while Justice Laskin gave greater weight to the factual matrix in his dissent. These competing approaches, using the same legal principles, demonstrate the risks of drafting an ambiguous indemnity, especially where the factual matrix provides a compelling story. In this case, the facts involved the Grassy Narrows mercury poisoning, which has plagued First Nations communities for decades.

Key Takeaways:

• An indemnity may cover first party (direct) claims depending on the language used in drafting the indemnity.[2] Drafters should address this clearly.
• If an indemnity is meant to cover expenses resulting from “statutory” claims, drafters should specify the types of statutory claims covered (e.g. regulatory orders).
• The term “successors” will be interpreted to mean corporate successors unless otherwise specified. Indemnities do not run with the land unless “successors-in-title” are specified.

Commercial List

The motion judge, Hainey J., found that Resolute and Weyerhaeuser were “entitled to be indemnified” under the 1985 Indemnity for their “costs of complying with the remediation order.”[3] Interpreting the 1985 Indemnity, Hainey J. concluded that the remediation order was covered by “the plain and ordinary meaning of the words used” in the 1985 Indemnity.[4] The terms “any province” and “statutory” and “proceeding” did not support an interpretation that would cover only third party claims, as Ontario had argued.[5] Although several provisions in the 1985 Indemnity suggested that the parties did not intend to include an MOECC order, this could not “override the clear, unambiguous and broad wording” of section 1, which described the scope of the indemnity broadly.[6]

Ontario Court of Appeal

Writing for the majority, Brown J.A. (Lauwers J.A. concurring) agreed with many of Justice Hainey’s findings. The majority held that Hainey J. had correctly stated the law and turned his mind to the factual matrix in which the contract was negotiated.[7] His focus on the text was also correct because, as Brown J.A. noted, the factual matrix may not always be helpful.[8] In this case, the 1985 Indemnity was sufficiently clear to ascribe little weight to its context. The majority found that Hainey J. had given “due consideration to the circumstances surrounding” the formation of the 1985 Indemnity.[9]

Nature of an Indemnity

The entire Ontario Court of Appeal agreed that the language used in an indemnity determines who and what will be covered; there is no presumption that an indemnity only covers third party claims. The majority found no overriding and palpable errors in Justice Hainey’s analysis of the words "any province" and "statutory" claim and "proceeding", which would seem to include claims from Ontario or its agencies.[10] However, in dissent, Laskin J.A. disagreed that these words were determinative. Laskin J.A. observed that “[n]otification, control of defence, and cooperation clauses are typical in indemnity contracts covering third party claims.”[11] Although the majority found that the indemnity covered regulatory orders, the indemnity agreement was certainly not air-tight. To avoid this kind of ambiguity, drafters should specify whether their indemnity covers first party claims and, more specifically, regulatory orders.

Factual Matrix

After establishing that Hainey J. was correct in his approach to contractual interpretation, Brown J.A. addressed Ontario’s arguments regarding mistakes of fact. Many of the factual errors that Ontario had identified ignored the “big picture” and focused on minutiae.[12] For example, Ontario argued that Justice Hainey’s “unsupported finding that the [waste disposal site] was itself discharging mercury into the nearby river-system improperly influenced his understanding of the 1985 Indemnity's scope.”[13] This, Ontario wrote, “led him to erroneously conclude that … Great Lakes had only purchased the Property in 1979 because Ontario had agreed to indemnify it from the costs of complying with regulatory orders in perpetuity.”[14] However, even if the waste disposal site was no longer discharging mercury, which is still publicly debated,[15] the evidence disclosed that all parties treated the waste disposal site as a serious environmental liability.[16]

Justice Laskin disagreed that any factual mistakes did not rise to the level of palpable and overriding. Regarding the mistaken belief that the waste disposal site continued to release mercury pollution, Laskin J.A. found this error to have significant bearing on the final decision of the motion judge:

“The motion judge's mistaken finding that discharges of mercury from the [waste disposal site] were an ongoing source of "serious environmental liability" undoubtedly drove his conclusion that these discharges could give rise to "pollution claims", and that unless the 1985 Indemnity covered first party claims, the respondents would be exposed to significant financial liability. His conclusion is wrong.”[17]

It is surprising that Laskin J. believed that the waste disposal site “could not in any sense pose a serious environmental liability.”[18] It may not have posed new liability due to the intensive monitoring, maintenance, and testing requirements pursuant to the site’s certificates of approval, but mercury is a persistent pollutant. Legacy contamination has a long residence time. Recent case law demonstrates that historical contamination represents a significant liability.[19] It was shrewd of Weyerhaeuser to protect itself against indeterminate liability for pollution that it did not cause.

Factual Matrix and the Spills Bill

The Spills Bill was enacted just two weeks before the 1985 Indemnity was signed. It created a new statutory cause of action that third parties could potentially pursue against Weyerhaeuser and Resolute. Ontario argued that this was why it added the phrase “statutory or otherwise” to the indemnity agreement; Ontario would cover this statutory liability just as it would cover similar civil liability.[20] Ontario argued that “the risk being addressed by the 1985 Indemnity was third party actions, such as those reflected in the Pollution Claims litigation or by the newly enacted Spills Bill; not regulatory orders.”[21] However, the majority relied on the parol evidence rule and excluded this as evidence of the parties’ subjective intentions when drafting the contract.[22]

Justice Laskin disagreed. In his dissent, Laskin J.A. found that the enactment of the Spills Bill did not fall within the parol evidence rule, which “does not apply to preclude evidence of the surrounding circumstances”.[23] The passage of the Spills Bill was “an objective fact that would have or reasonably ought to have been known to the parties around the time the 1985 Indemnity was entered into.”[24] Still, if Ontario wanted to reserve the right to issue future orders, which are authorized by statute, the words “statutory or otherwise” should have been clearly limited. Justice Hainey’s underlying point still remains: it would be commercially absurd to exclude claims by third parties when the Ministry of Environment and Climate Change could bring the exact same claim unhindered by the scope of the indemnity.

Indemnities Do Not Run with the Land

One of the remaining contractual interpretation issues was whether the indemnity could “run with the land.”[25] The 1985 Indemnity referred to “successors” without specifying “successors-in-title.” Ontario submitted that Hainey J. had erred in finding that the Indemnity “would indemnify future owners of the disposal site for any environmental liability that might arise.”[26] Brown J.A. agreed and followed the principle laid out by the SCC in Heritage Capital Corp v Equitable Trust Co:

“No positive or affirmative covenant requiring the expenditure of money or the doing of an act can, apart from statute, be made to run with the land.”[27]

Conclusion

Couched within the issues of contractual interpretation were some important insights for environmental lawyers. Regulatory orders are a significant source of liability and indemnities can be a useful tool to allocate those risks. However, drafters must avoid uncertain language or risk costly litigation. Prudent drafters should specify that their indemnity covers first-party claims such as regulatory orders. Drafters will also need to take care in assigning and passing indemnities to “successors”, which will be read as corporate successors. Overall, clearer and more specific language can ensure that indemnities fulfil their purpose, which is to allocate risk with certainty and reflect the parties’ intentions.