A Costly Class Action: The Failed Nuisance Claim in Smith v Inco Ltd

The final act in an eleven year long class proceeding has concluded with Smith v Inco Ltd, 2013 ONCA 724. The defendant Inco had successfully defended itself against the claim for damages in the class action. Here, it sought to recover legal costs of over $5 million. Inco was awarded a still substantial, though smaller award of $1.76 million.

On this appeal, the main respondent was the Law Foundation of Ontario, an agency jointly sponsored by the Ontario Government and the Law Society. One of its functions is to support deserving class actions by paying for disbursements, and the cost award in the event that the class loses. Under Ontario law, the individual named plaintiff would be liable for millions of dollars in costs unless somebody else steps forward to pick up the bill. The Court of Appeal affirmed the costs award of the trial judge, and one of the factors considered was the precarious financial condition of the Law Foundation.

Background to the Case

The plaintiffs lived in the town of Port Colborne, where Inco operated a refinery from 1918 to 1984. Around 2000, it was discovered that there were high concentrations of nickel particles in the soil. A class action certification proceeding was started in 2002, representing 7,000 affected homeowners. Health concerns had been raised by the plaintiffs’ counsel, but these were not advanced at trial, presumably due to a lack of evidence. The case was limited to a claim that the nickel in the soil reduced the value of their houses.

A trial finally took place in 2010, Smith v Inco Ltd, 2010 ONSC 3790, where the plaintiffs were awarded $36 million. This was reversed on appeal in Smith v Inco Ltd, 2011 ONCA 628. This Court of Appeal decision will stand as a useful reference, in providing a thorough review of the law of nuisance in Ontario. (An application to appeal to the Supreme Court was dismissed).  The Court ruled that it was not enough to show that the soil had changed due to the acts of the defendant; the plaintiffs had to prove that this change was detrimental, by rendering property less useful (e.g., for agriculture), or injurious to health. The Court found no evidence in support of the claim, and even doubted the evidence regarding property values.

The Court of Appeal suggested that, if property values were affected, it may ironically have been due to fears encouraged by the class action itself:

The approach followed by the trial judge effectively removes any need to show that Inco’s operation of its refinery caused any harm of any kind to the claimants’ land. It extends the tort of private nuisance beyond claims based on substantial actual injury to another’s land …. not by virtue of anything done to the property by the defendant, but because of public concerns generated many years after the relevant events about the possible effect of the defendant’s conduct on the property. (para 59)

The Rule in Rylands v Fletcher, [1868] UKHL 1, which had been relied upon by the trial judge, was also given  extensive review.  The Court held that its application ought to be restricted to the narrow class of cases to which it originally applied (a catastrophic escape of something into neighbouring property), and not all and sundry types of pollution.

Principles Governing the Appeal of Costs

Under the Class Proceedings Act, 1992, SO 1992, c 6 (“CPA“), a judge has considerable discretion over the costs award paid to the victorious party.

The unanimous decision of the Court of Appeal was delivered by Justice MacPherson. He noted that this “was a long (several years, including a 45 day trial) and complicated class action proceeding involving a great deal of evidence, several significant legal doctrines, and many millions of dollars.” However, the appeal on costs is more straightforward. Considerable deference has to be given to the decision of the trial judge:

As expressed by a unanimous panel in Hamilton v Open Window Bakery Ltd., [2004] 1 SCR 303, …“[a] court should set aside a costs award on appeal only if the trial judge has made an error in principle or if the costs award is plainly wrong”. (para 18)

There were several specific issues related to costs that the Court went through point by point.   The most significant issue relates to whether the trial raised a novel point of law, or important public issue, which would justify a lower cost award under the CPA.   Inco questioned the novelty of the case, pointing to the refusal of the Supreme Court to allow an appeal.  Justice MacPherson rejected this as irrelevant:

Against the backdrop of several hundred applications for leave to appeal each year, the Supreme Court of Canada’s long-standing practice has been to dispose of these applications without providing reasons…. I would not stretch this reality to encompass the broad proposition implicitly advanced by the appellant, namely, that if the Court refuses leave, the appeal must not raise a question of public importance or an important issue of law. (para 26)

Like the trial judge, I do not think that there is always a bright line between old or settled and novel points of law. Novelty exists on a continuum, and s. 31(1) of the CPA permits costs awards to be made on a continuum, from full costs to reduced costs to no costs for the successful party. (para 29)

Inco also argued that the public interest in behaviour modification was not engaged, as it was found not to have committed any damage. The court pointed out that this is too narrow a view. Behaviour modification exists in enhancing awareness of the fact that environmental harm may give rise to class actions:

I have addressed the appellant’s specific arguments about the public/private dichotomy and behaviour modification because they were made and deserve a response. However, in my view, a simple fact stands as a complete answer to the appellant’s position on this issue. The problem with the appellant’s position is that this court has already said – three times – that this case involves the public interest. (para 42)

Prior to the hearing of its 2011 appeal, Inco had offered to settle. However, this settlement offer did not fall under the terms of Rule 49.10, which applies to situations where judgment is in favour of the plaintiff. Nevertheless, Inco asked the judge to award substantial indemnity for the costs incurred after the offer to settle. The Court noted that others had asked for this in the past, but there was a well established policy against it, as set out most recently in Davies v Clarington (Municipality), 2009 ONCA 722:

[E]nhanced costs should be awarded only on a clear finding of reprehensible conduct on the part of the party against which the costs award is being made. Applying these decisions, the trial judge found that the Class Proceedings Committee “did not conduct itself in a reprehensible manner so as to justify an enhanced costs award in Inco’s favour.” (para 61)

Avoiding a Chilling Effect on Class Proceedings

Finally, there arose the issue of the Class Proceedings Fund’s ability to pay:

[T]his court has previously acknowledged that “[i]f the Fund were required to absorb steep costs awards imposed on litigants even though the proposed action displays the factors in s. 31(1) of the CPA, this would have an undesirable chilling effect on class proceedings.” (para 66)

The Court noted that the trial judge had not been unbalanced, as he also acknowledged that “Inco does not have a bottomless supply of money with which to defend claims. Inco is clearly out-of-pocket for its legal fees and for its legal disbursements.” (At para 64.) Interestingly, in making this comment, the judge did not actually refer to the publicly available information about the defendant’s financial situation. This company (now going by the name Vale Canada Ltd.) has in the last several years had an average annual net income of over $10 billion, making it well able to absorb some uncompensated legal costs. 

A larger policy issue, that was not discussed here, is whether the CPA was correctly designed, in making the named plaintiff liable for costs. A number of other provinces do not have such a condition. The comments of Justice Edward Belobaba in Rosen v BMO Nesbitt Burns Inc., 2013 ONSC 6356, are worth pondering:

Most members of the class action bar, whether acting for plaintiffs or defendants, agree that a “no costs” rule would be much more sensible. Like them, I also wish that the recommendations on costs as set out in the Ontario Law Reform Commission’s Report on Class Actions had been accepted. Instead, the provincial legislature decided to adopt the views of the Attorney-General’s Advisory Committee and continue the “costs follow the event” convention for the very different world of class actions as well. I was a member of that Advisory Committee. I now realize that I was wrong and that the OLRC was right. I understand that the provincial Law Commission is undertaking a review of the Class Proceedings Act, including the costs provisions. Hopefully, our mistake will be corrected. (para 2)

One might add to this sentiment, that reformers should strive to find a way to streamline the process and reduce the enormous costs of these actions to all the parties involved.

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