Contractual Interpretation and Indemnity for Environmental Damage in Grassy Narrows

On 28 March 2019, the Supreme Court of Canada (“SCC”) will hear Resolute FP Canada Inc, et al v Ontario (Attorney General), 37985, an appeal of a lengthy 270-paragraph decision from the Court of Appeal of Ontario (“ONCA”) of Weyerhaeuser Company Limited v Ontario (Attorney General), 2017 ONCA 1007 [Weyerhaeuser].

At first glance, Weyerhaeuser appears to be a conventional environmental law issue. On closer consideration, this case turns out to be a complicated mix of contract, property, and corporate law, with important implications to the affected Aboriginal communities. In anticipation of the SCC hearing, I outline the facts behind the litigation, the findings of the motion judge and the ONCA, and provide further speculatation on what we might see from the SCC.

Background

Dryden Paper Mill and the Grassy Narrows Litigation

Dryden Paper, later renamed Reed Ltd (“Reed”), owned and operated a pulp and paper mill, as well as a nearby chemical plant that supplied bleach for the paper, and waste disposal site (“WDS”) in Dryden, Ontario. This chemical plant released mercury waste into the surrounding natural environment, contaminating the nearby English and Wabigoon Rivers. This led to the closure of a commercial fishery and had adverse health effects on members of the Grassy Narrows and Islington First Nations living on nearby reserves.

In 1977 the two First Nations bands sued Reed for damages for personal injuries, loss of jobs, and deprivation of their way of life caused by the contamination of the rivers (the “Grassy Narrows Litigation”).

In 1979, Reed entered into negotiations with Great Lakes Forest Products Limited to sell its pulp and paper operation. After a complex corporate history, Great Lakes Forest Products Limited became the appellant Resolute FP Canada Inc (“Resolute”) in 2012.

Resolute was hesitant to proceed with the sale because of the Grassy Narrows Litigation. The Provincial Government stepped in to facilitate the sale out of concerns the mill could close and hurt the local economy if the sale fell through. Critically, the province agreed to limit the combined liability of Resolute and Reed for any environmental damage caused by Reed prior to the purchase to $15 million (the “1979 Indemnity”). Both companies agreed to these terms.

Indemnity

The Grassy Narrows Litigation settled in 1985, with Reed and Resolute paying $11.75 million to the affected First Nations. As part of the settlement, Ontario provided yet another indemnity (the “1985 Indemnity”) to the companies as well as successors and assignees, which included the following language:

against any obligation, liability, damage, loss, costs or expenses incurred by any of them after the date hereof as a result of any claim, action or proceeding, whether statutory or otherwise … because of or relating to any damage, loss, event or circumstances, caused or alleged to be caused by or with respect to, either in whole or in part, the discharge or escape or presence of any pollutant by Reed or its predecessors, including mercury or any other substance … (hereinafter referred to as ‘Pollution Claims’)” (Weyerhaeuser, para 31, emphasis in original).

The interpretation of this agreement forms the crux of the litigation.

Another Party in the Mix

In 1998 Weyerhaeuser Company Limited entered into an agreement to purchase some of Resolute’s assets. For reasons of environmental liability, Weyerhaeuser sought to exclude the WDS from the sale.

When severance of the WDS property could not be achieved prior to the closing of the agreement, conveyance of the title went instead to Weyerhaeuser and was subsequently re-conveyed to Resolute two years later in 2000.

In 2009, Resolute became insolvent, which resulted in the abandonment of the WDS property.

A 2011 Ministry of the Environment (“MOE”) report of the site found that the contaminating lifespan of the WDS would entail another 35 years and estimated that the cost of continued monitoring over the remaining lifespan would be approximately $273,000.

As a result of the report, the MOE imposed obligations on Resolute and Weyerhaeuser, as a former owner, which required the companies inter alia to repair site erosion, file annual reports, pay to the MOE $273,000, and “take all reasonable measures to ensure that any discharge of a contaminant to the natural environment is prevented and any adverse effect that may result from such a discharge is dealt with according to all legal requirements” (Weyerhaeuser, para 50).

It was then that Weyerhaeuser and Resolute commenced action against Ontario, claiming that they too enjoyed the benefit of the indemnity the province provided to the earlier owners in the 1985 Indemnity. As such, they asserted that the Province was obligated to indemnify them for any costs associated with the MOE’s orders. Ontario denied that the 1985 Indemnity had such a broad scope, maintaining that it only covered third party claims resulting from mercury spills and not regulatory compliance costs. All parties moved for summary judgement.

The motion judge found in favour of Weyerhaeuser and Resolute, and held that both were entitled to indemnification for compliance costs. Ontario appealed to the ONCA, contending that the motion judge erred in both fact and law.

Who Enjoys the Indemnity?

The motions judge found that Resolute, as corporate successor to Great Lakes, was indisputably a “successor” within the meaning of the 1985 Indemnity, and that Weyerhaeuser was likewise covered under the agreement as both an assignee and successor-in-title.

Alternatively, the ONCA allowed Ontario’s appeal in part, finding that Resolute did not enjoy the benefit of the 1985 Indemnity. Justice Brown, writing for the ONCA, reasoned that while Resolute was a corporate successor of Great Lakes, through the act of selling the property to Weyerhaeuser, Resolute did not possess legal interest in the property at the time of the 1985 Indemnity and thus did not have a legal interest in its benefits. Justice Brown further noted that the presence of “and” in the 1985 Indemnity, which covers “successors and assigns” does not act to retain in Resolute rights that it completely transferred to Weyerhaeuser (Weyerhaeuser, para 198). The ONCA remitted to the court below to determine the matter of Weyerhaeuser’s rights, if any, under the 1985 Indemnity.

Scope of Indemnity? 

Principles of Interpretation

In his dissent, Justice Laskin, found it unnecessary to determine whether Resolute and Weyerhaeuser were successors or assignees, and simply assumed that they were.

Instead, Justice Laskin focused his attention on the nature of the indemnity. All judges involved in the case grounded their reasoning in the principle of contractual interpretation that the objective is to determine “the intent of the parties and the scope of their understanding” (Sattva Capital Corp v Creston Moly Corp, 2014 SCC 53, para 47, quoted in Weyerhaeuser, para 64). Despite sharing a perspective on the applicable law, the justices came to vastly different interpretations on the law’s application to the facts.

At trial, the motions judge insisted that the interpretation of a contract must start with the actual language of the contract, and suggested that recourse to the surrounding factual matrix is an ancillary part of the process. The ONCA majority agreed that “the plain meaning of the words in a contract is the logical place to start the contractual interpretation exercise” (para 76).

Justice Laskin took issue with this two-stage approach as improper, insisting that:

Context controls meaning. Rarely can the words of an agreement be understood without some knowledge of their context” (para 237).

Plain Meaning

On the two-stage approach, the motions judge and the ONCA majority relied on the words such as “any obligation” and “any claim, action or proceeding, whether statutory or otherwise” (Weyerhaeuser, paras 31 and 97), to find that the 1985 Indemnity could cover Resolute and Weyerhaeuser against the costs of regulatory compliance.

However, Justice Laskin took issue with this broad interpretation of “any claim, action or proceeding” instead of reading them within their relevant context (Weyerhaeuser, para 238). He further noted that indemnity provisions in contracts typically only cover third party claims, and it is only on rare occasions—depending on the language of the contract—that it might also cover first party claims. Since Ontario is a party to the 1985 Indemnity agreement, and the regulatory compliance obligations came from the MOE, a branch of the Ontario government, it is a first party claim, which Justice Laskin maintained was not supported by the context of the contract as a whole or the factual matrix.

Entire Document

In reading the context of the entire document, Justice Laskin focused more on the nature of “pollution claims.” He found that the MOE’s regulatory compliance orders cannot be interpreted as pollutions claims under the 1985 Indemnity because they relate only to the monitoring of the WDS, which were intended to and have prevented the discharge or escape pollution (Weyerhaeuser, paras 261-62).

The ONCA found that thee motions judge made a factual error in finding that the rivers were contaminated by discharges from the WDS when it was the chemical plant that caused the pollution. The ONCA majority found the error to be minor and that it had no effect on the contractual interpretation. Justice Laskin in dissent found this error to be pivotal, because “[t]he motion judge’s mistaken finding that discharges of mercury from the WDS were an ongoing source of ‘serious environmental liability’ undoubtedly drove his conclusion that these discharges could give rise to ‘pollution claims’” under the 1985 Indemnity agreement (Weyerhaeuser, para 233).

Factual Matrix

Although there were many circumstances surrounding the formation of the 1985 Indemnity which could be used to determine the intent of the parties, the most consequential and controversial was the 1979 Indemnity agreement. Justice Laskin maintained that the 1985 Indemnity had its genesis in and simply replaced the 1979 Indemnity, which limited liability to court orders or settlements resulting from environmental damages (Weyerhaeuser, paras 241-42). Since the 1979 Indemnity was limited to third-party claims, Justice Laskin reasoned that the 1985 Indemnity does not extend to first-party claims such as the MOE’s compliance orders against Resolute and Weyerhaeuser.

The ONCA majority found this to be “an improper use of factual matrix evidence,” seeing no error in the motion judge’s anchoring his analysis in the specific words of the 1985 Indemnity and treatment of 1979 Indemnity as a “distinct deal” (Weyerhaeuser, para 96).

Predictions

Although the ONCA majority agreed with the motions judge in nearly every aspect, the bench parted ways on the interpretation of successor and assignee under the 1985 Indemnity agreement. Although Justice Laskin in dissent was unconcerned with the issue, since Ontario’s ONCA appeal was partially granted on this issue, it very possible that the SCC will seek to clarify the nature of Resolute and Weyerhaeuser’s property interests and indemnity benefits.

Since Justice Laskin dissented so strongly against the motion judge and majority’s vastly different approach to contractual interpretation, I think it more likely that the SCC will focus its attention on the proper method of analysis. Though it is hard to find fault with the principle that the words of the actual contract are the logical starting point for interpretation, Justice Laskin likewise makes the persuasive point that often terms are too broad unless read within their context.

With such a complicated corporate and legal history, it is impossible to predict what contextual factors beyond the 1979 Indemnity and those considered by the courts below the SCC will find relevant to the interpretation of the 1985 Indemnity. The Court may even consider important issues at the heart of the situation, but lacking in the previous judgments, namely the environmental damage of life-sustaining lands and rivers and the catastrophic effects this had on the lives of the peoples of the Grassy Narrows and Islington First Nations.