The Court of Appeal’s recent decision in Crombie Property Holdings Ltd. v. McColl-Frontenac Inc., 2017 ONCA 16, addresses the diligence requirements in the context of contaminated land transactions. The decision is important in relation to environmental due diligence in a real estate transaction, particularly as to when “knowledge” of contamination arises for the purpose of understanding when applicable limitation periods in environmental litigation may be deemed to have expired. The Court concluded that knowledge of “possible contamination” obtained in a Phase I Environmental Site Assessment (“ESA”) “may be enough to put a plaintiff on inquiry and trigger a due diligence obligation” but does not automatically amount to knowledge of actual contamination or discovery of a claim. The Court also held that a “suspicion” of contamination can also give rise to a due diligence obligation, if, in satisfying this duty of inquiry, a reasonable person would have discovered the existence of a claim, the limitation period will be deemed to have begun.
Facts
The appellant, Crombie Property Holdings Limited (“Crombie”) brought an action on April 28, 2014 for damages resulting from the contamination by hydrocarbons of a property (the “Crombie Property”). The contamination was alleged to have migrated from an adjacent property (the “Dimtsis Property”), which had been used as a gas station until 2004. The defendants/respondents were the owners of the Dimtsis Property. In its statement of claim, the appellant asserted that it was not aware of soil and groundwater contamination at its property that had migrated from the Dimtsis Property until September 17, 2012, notwithstanding they had purchased the property on April 10, 2012. Crombie had hired Stantec Consulting to assist with its environmental due diligence.
The defendants brought a motion for summary judgment on the basis that Crombie had discovered the contamination more than two years before commencing its claim, and was therefore time-barred. In particular, the defendants relied on the following facts that, they alleged, occurred prior to two years before the claim was commenced:
- Crombie’s decision to waive all conditions, including environmental conditions, for the purchase of the Crombie Property on March 8, 2012;
- The receipt by Crombie of a Phase I ESA report dated March 20, 2012; and
- Crombie’s decision to complete the transaction on April 10, 2012.
Crombie argued that it did not have actual knowledge of contamination on the Crombie Property until it received a final Phase II ESA.
Motion Judge’s Reasons
The motions judge granted the motion and dismissed the action. She concluded that the appellant had become aware of sufficient material facts to form the basis of the action by March 9, 2012, at which time the appellant waived all conditions for the purchase transaction, including the environmental conditions. In the alternative, she held that although the draft Phase II report was dated May 9, 2012, Crombie had more than a sufficient basis for an action by March 30, 2012, when laboratory results were “made available” to it. Further, the motion judge held that, even if Crombie wasn’t provided the results until a later date, Crombie ought to have known about the contamination and did not exercise proper diligence.
Court of Appeal’s Reasons
The Court allowed Crombie’s appeal and set aside the motion judge’s decision. In reaching this conclusion, the Court found that the motions judge made the following errors: (i) she equated knowledge of suspiciouscontamination with Crombie’s actual knowledge that the Crombie property was contaminated; and (ii) she ignored the “relevant and important” circumstances of the appellant’s purchase of the Crombie property.
(1) Conflating “Suspicion” of Contamination with “Actual Knowledge” of Contamination
The difference between a Phase I ESA and a Phase II ESA was central to the Court of Appeal’s decision. A Phase I consists of a review of available records, interviews with relevant persons and a site visit, but does not include any subsurface drilling or soil or groundwater sampling. Its purpose is to identify “evidence of potential or actual environmental contamination.” A Phase II ESA will often follow by investigating the areas of potential concern.
It was not sufficient that Crombie had suspicions of possible contamination. The Court found that the motions judge failed to accurately determine when Crombie had “actual knowledge of the elements of its claim.” The Court set out the discoverability test. While the suspicion of certain facts or knowledge of a potential claim may be enough to put a plaintiff on inquiry and trigger a due diligence obligation, the limitation period only begins to run when the plaintiff is “actually aware” of the facts sufficient to bring a claim or when a reasonable prospective plaintiff must have known or ought to have known the material facts necessary for a claim. The Court of Appeal concluded that the motions judge did not identify any evidence which supported the conclusion that Crombie had “actual knowledge” of contamination on March 9, 2012. The “suspicion” of contamination was sufficient to give rise to a duty of inquiry, but was not sufficient to meet the requirement for actual knowledge. Rather, it was the subsurface testing (i.e. the Phase II ESA work) that was “the mechanism by which [Crombie] acquired actual knowledge of the contamination.”
(2) Failing to Consider Relevant Circumstances
The Court also held that the motions judge did not consider “relevant and important circumstances” of the transaction. The Court took the view that a multi-property purchase with waiver of conditions was relevant to whether a reasonable person, after the waiver of conditions, would have sought out and obtained laboratory results that indicated an exceedance of regulatory standards prior to the time that it knew about the results. Failing to recognize this consequential result of the waiver factored into the motion judge’s improper conclusion that Crombie did not conduct its diligence appropriately or in a timely manner.
