As an EHS coordinator, you work hard to ensure that your company complies with environmental laws. You set up an EHS program that has rules and policies on environmental compliance, train workers on those rules and policies and make sure that supervisors keep a close eye on workers to ensure they do what they’re supposed to do. But if your company uses outside contractors at its facility, your compliance efforts won’t be enough to protect your company from liability. The contractor’s workers or supervisors might violate an environmental law by, say, discharging a toxic substance into a stream. At least you can take comfort in the knowledge that if such a violation were ever to happen, the contractor would be 100% liable for the offence.
But guess what? That silver lining is an illusion. Your company could also be liable for the contractor’s offence. All prosecutors would have to do to hold your company responsible is prove that it exercised “care and control” over the contractor’s activities. And here’s more sobering news: It doesn’t take much for a prosecutor to prove that a company exercised care and control over its contractors. The moral of the story: Companies that hire contractors to work at their facility—especially if the work is environmentally sensitive—may be liable for environmental violations that those contractors commit, says BC environmental lawyer Paul R. Cassidy. We’ll explain the risk of liability for contractors’ environmental offences and what you can do to manage that risk. There’s also a Model Clause that you can give to your company’s lawyer to adapt and add to any agreements with contractors to protect your company.
THE LIABILITY RISK
The potential for a company to be liable for its contractors’ environmental offences is nothing new. In fact, the Supreme Court of Canada discussed the concept in its famous R. v. Sault Ste. Marie case of 1978, in which it established the due diligence defence. In that case, a city had signed an agreement with a garbage contractor to dispose of the city’s garbage. The agreement required the contractor to provide a disposal site and adequate labour, material and equipment. The site selected bordered a creek, which ran into a river. The dumping of garbage and waste at the site polluted those waterways. The city was charged with violating an Ontario environmental law. A trial court dismissed the charges, ruling that the city had nothing to do with the actual garbage disposal operations.
But the Canadian Supreme Court overturned the ruling and ordered a new trial. The city’s liability for the disposal operation’s non-compliance with environmental laws wasn’t based solely on the terms of its contract with the garbage contractor, the Court explained, but on the city’s position with respect to the activity that caused the pollution. More precisely, the city’s liability was based on its control over the operation. If an agreement between a contractor and a company specifically gives one party control over the activity, that party will be liable for pollution that it could have used its control to prevent. If the agreement doesn’t expressly designate which party has control, then liability depends on whether the party was in a position to control the activity that caused the pollution. That assessment, said the Court, will depend on all the circumstances of the case. And the fact that the activity was caused by a contractor rather than a company worker “will not be decisive,” the Court noted.
The Sault Ste. Marie approach remains the law in Canada to this day. So liability for a contractor’s environmental offence depends on whether the company exercised care and control over the contractor and its activities, says Cassidy. If the company exercised care and control, it’ll likely be on the hook for the contractor’s environmental violations. Conversely, if the company didn’t exercise care and control, it probably won’t be liable.
The burden of proof a prosecutor must meet to establish care and control is very low, Cassidy warns. Essentially, if the contractor is doing work on the company’s property or in its workplace on its behalf, the company probably has the degree of care and control necessary to make it liable, Cassidy explains. And it may not matter whether the company directed the contractor’s activities that caused the pollution or simply allowed them to occur, he adds.
MANAGING THE RISKS
To protect your company from possible liability for a contractor’s environmental offence, take the following three steps:
Step #1: Screen Contractors Carefully
When hiring a contractor, don’t just pick a name out of the phonebook, says Cassidy. Instead, screen contractors carefully. Get references and contact them. Find out if there were any environmental problems or complaints on their prior jobs. Check out their environmental performance and history. The last thing your company needs is to hire a contractor with a “consistent pattern of environmental offences,” he says.
If a contractor has prior convictions for environmental offences, you probably shouldn’t hire it unless there’s a compelling explanation, Cassidy advises. Look into the circumstances of the violations and exercise common sense, he adds. For example, if a contractor committed one minor environmental offence 10 years ago and has had a clean record since, don’t automatically write it off.
The amount of scrutiny you subject potential contractors to will depend on the environmental sensitivity of the work you’re hiring them to perform, notes Cassidy. For example, you’ll need to do less when hiring a contractor to upgrade your computer system than you would if you were hiring a contractor to install an underground fuel line on your company’s property. But make sure you consider all aspects of the work and consider even the risks that aren’t obvious, he adds.
Insider Says: Don’t skip screening contractors just because you’ve used them in the past, warns Cassidy. Contractors’ ownership and management often change. So the contractor you used three years ago may be run by a completely different set of people today, he says. So verify the contractor’s corporate structure and make sure that it hasn’t had any environmental problems since it last worked for your company.
Step #2: Include Protections in Written Agreement
If a contractor passes your screening process, sign a written agreement with it. Your company can’t contract away its liability for violations of environmental laws. As long as the contractor is doing work on your watch, your company is exposed to potential liability. But a court will consider the terms of an agreement with a contractor to determine the intentions of both sides and assess whether your company exercised or was in a position to exercise care and control over the activities that caused the pollution.
Example: A Newfoundland partnership hired a construction contractor to build a dam. Nearby water became discoloured from construction runoff. The partnership was charged with violating the Fisheries Act. The court dismissed the charges, ruling that there wasn’t sufficient proof that the runoff was hazardous to fish. So it never had to rule on the partnership’s due diligence defence. But the court said that it would have rejected that defence if it had had to make such a ruling.
The court noted that the terms of the agreement were relevant in determining if the partnership had the ability to influence the contractor’s actions. Here, the partnership did have control over the company’s activities: It had a worker and an environmental consultant onsite monitoring environmental compliance of the work. And these partnership representatives expressed concerns and made suggestions about the work to the construction company, which generally acted upon those concerns and suggestions, said the court [R. v. Abitibi Consolidated Inc.].
Although your company can’t contract its way out of environmental liability, it can protect itself in its agreement with a contractor. So in that agreement, include requirements that will help prevent environmental problems and protect you if some occur anyway. On page 4, we’ve given you a Model Clause containing these requirements that can be adapted and used in your company’s contracts (Caveat: Don’t just plug the Model Clause into your agreements; show it to the company’s lawyer first.) Your clause, like our Model Clause, should require the contractor to:
Comply with the company’s EHS program. Any contract should require the contractor to comply with the environmental laws. But that’s not enough. You should also require it to comply with your company’s EHS program, advises Cassidy. The contractor doesn’t necessarily have to comply with every aspect of your EHS program, he notes. But it should comply with any rules and procedures in your EHS program that relate to the work it has been hired to perform. And its workers should get any relevant training required by your EHS program—before they start work for your company, he adds. It’s also a good idea to get the right to demand information about the contractor’s own EHS program.
Provide proof of adequate training. In some cases, you may hire a contractor to perform a very specialized job for which its workers have already received extensive training. For example, you may hire a trucking company that specializes in transporting hazardous materials to move such materials for your company. It’s likely that the trucking company and its workers have received extensive training in compliance with the Transportation of Dangerous Goods Act. And your EHS program may, in fact, not address this law at all or do so in only a general way. In that case, requiring the contractor to comply with your EHS program may not make sense, says Cassidy. Instead, require the contractor to provide proof that its workers have been adequately trained on compliance with all relevant environmental laws, he advises.
The two requirements above will help prevent environmental offences from occurring in the first place by ensuring that the contractor and its workers are qualified to perform the work safely and in compliance with the environmental laws. But there’s no guarantee that the contractor won’t commit an environmental offence anyway. So to ensure that your company won’t suffer financially if it’s held liable for that offence, the contract should also require the contractor to:
Indemnify your company. The contractor should “indemnify” your company—that is, it should agree to pay or reimburse the company for any and all costs related to the environmental violation it caused, suggests Cassidy. Those costs should include fines, remediation expenses, lawyers’ fees and any other related expenses.
The contractor may try to limit its financial risk under the indemnity to the amount of the contract fee. Don’t agree to such a limit, advises Cassidy. Why not? Because potential fines for environmental offences are likely to be much greater than the amount of the contractor’s fee. For example, if the company agrees to pay the contractor $10,000 for its services and it commits an environmental offence, the contractor would only have to indemnify the company for $10,000 in related costs. But that won’t do your company much good if it’s hit with a $250,000 fine or millions of dollars in remediation costs, which is not an outlandish amount for a serious environmental offence.
Also, don’t let the contractor limit its indemnification obligation to violations caused by “gross negligence” only, adds Cassidy. If the contractor’s actions cause an environmental offence, it should indemnify your company—regardless of the level of its negligence and even if it wasn’t negligent at all, he says.
Provide proof of insurance. If the contractor is a mom-and-pop operation, requiring it to indemnify your company may be futile, notes Cassidy. A small contractor may simply not be able to reimburse you for, say, $500,000 in remediation costs. So require the contractor to provide proof that it’s adequately insured. And require it to list your company as an “additional insured” on the policy. Then the company can go after the insurance company to collect any money owed by the contractor because of its environmental violation.
Insider Says: The contract recommendations above are appropriate when you hire a contractor to perform a particular task, such as dig a well or build a storage facility. But if you sign a contractor to a long-term agreement to perform a regular service, such as janitorial or maintenance work, include additional protections, says Cassidy. For example, require proof of ongoing training of its workers and get the right to periodically review its environmental compliance. Also, get the right to terminate the agreement if the contractor violates the environmental laws, is the subject of environmental complaints or is sued or prosecuted for environmental offences—even if those complaints or offences are unrelated to the work the contractor is performing for your company, says Cassidy.
Step #3: Adequately Supervise Contractor
Don’t assume that a contractor will comply with its environmental obligations just because they’re spelled out in the agreement. You can’t allow a contractor onto your property and let it “run amok,” says Cassidy. You must adequately supervise the contractor while it’s working for your company, he advises. If you don’t and the contractor violates an environmental law, your company is likely to be held responsible for that violation.
Example: The manager for a property development company hired a tree cutting service to cut down some trees on property owned by the company. The manager had dealt with this service before and was satisfied that it was competent. But the service started cutting down trees in violation of a municipal bylaw that protected trees of certain sizes and species. The city issued a stop work order, which the service violated by continuing to cut down protected trees. It issued another stop work order, but the service violated that one, too. The property development company was charged with violating the bylaw and failing to comply with a stop work order.
The company argued that it had exercised due diligence. It had hired a tree cutting service that it believed to be competent and gave that service specific instructions about the tree cutting on the property. But the service didn’t follow these instructions. And after being notified about the stop work orders, the company told the service to stop cutting down trees and cooperate with the city. Again, the service didn’t comply. But the court ruled that the company hadn’t exercised due diligence. Neither the company nor its property manager had properly supervised the service and the tree cutting activities, the court explained [Brantford (City) v. 1602356 Ontario Inc.].
Conclusion
Hiring contractors to perform certain work may be efficient for your company’s business. But it also may complicate your job as EHS coordinator. Ensuring that your company and its workers comply with the environmental laws and your EHS program isn’t enough. You must also ensure that anyone doing work in your company’s workplace or on your company’s behalf complies with the law. So you should be involved in the process of hiring contractors. Then you can ensure that the company hires contractors that are qualified to perform the work and have good environmental compliance track records. And you can make sure the contractors that are hired understand their environmental compliance obligations while working for your company.
INSIDER SOURCE
Paul R. Cassidy: Partner, Blake, Cassels & Graydon, LLP, 595 Burrard St., Ste. 2600, Three Bentall Centre, Vancouver, BC V7X 1L3; (604) 631-3300; Paul.Cassidy@blakes.com.
SHOW YOUR LAWYER
Brantford (City) v. 1602356 Ontario Inc.: [2006] ONCJ 5 (CanLII), Aug. 23, 2005
R. v. Abitibi Consolidated Inc.: [2000] N.J. No. 153, May 19, 2000
R. v. Sault Ste. Marie: [1978] 2 S.C.R. 1299, May 1, 1978
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