On October 7, 2011, the Court of Appeal for Ontario released its decision in the Smith v. Inco class action overturning the trial judge's $36-million award and providing an overview of the torts of nuisance and strict liability. This case was brought by a class representing approximately 7,000 property owners surrounding the former Inco nickel refinery in Port Colborne. Although operations at the plant had ceased in 1984, the class alleged that the historical emissions from the plant and the subsequent disclosure of the potential impacts of these emissions negatively affected property values after September 2000. At the common issues trial, the class alleged that Inco was liable on the basis of trespass, private nuisance, public nuisance and strict liability (Rylands v. Fletcher). Mr. Justice Henderson dismissed the claims in trespass and public nuisance but held that Inco was liable on the basis of private nuisance and Rylands v. Fletcher.
The Court of Appeal, however, granted Inco's appeal and dismissed the balance of the action. The Court unanimously concluded that the class failed to establish Inco's liability in private nuisance or strict liability and, in any event, failed to establish any damages. Although it was unnecessary to do so, given its decision on liability and damages, the Court of Appeal addressed the trial judge's findings on the limitation period as they had potential application to other class action claims in which limitation period defences are at issue.
For class action experts and observers, the most notable component of the Court of Appeal's decision is the portion relating to limitation periods.
The trial judge found that “most property owners” were unaware that nickel in the soil could affect their property value prior to 1990 and that this information was not known to “most members of the public” until a meeting of real estate board members on February 15, 2000, when the real estate agents in Port Colborne were advised of a Ministry of the Environment study (publicly released on January 26, 2000) which addressed the potential effect of nickel contamination on property values.
The trial judge's analysis of the limitation period focused on the following question: When did class members know or ought to have known that nickel in the soil could affect the values of their properties? More specifically, the Court considered whether the limitation period starts to run when one class member, a majority of class members or all of the class members knew or ought to have known the material facts. The trial judge noted an absence of case law addressing this specific question and concluded that the cause of action arose as of the date when the “overwhelming majority of the class members” discovered the material facts. Accordingly, the trial judge found that the limitation period began on February 15, 2000.
The Court of Appeal strongly disagreed with the trial judge's conclusion. The Court explained that it was an error to treat the limitation period for the class as running from the date when a majority, even an overwhelming majority, of the class members knew or ought to have known the material facts in issue. Fixing the starting date for the limitation period as the day when most class members became aware of the cause of action revived causes of action for some class members whose limitation periods had long since expired. This issue was identified by the trial judge but was ultimately ignored, as he concluded that the class members who were aware of the material facts prior to 2000 were an “insignificant minority”. Accordingly, the Court of Appeal held that the applicable limitation period was not a common issue and should not have been dealt with as such by the trial judge. It would have been more appropriate for the court to have dealt with the individual limitations defences after the common issues trial.
The Court of Appeal also overturned the trial judge's findings with respect to the claim in nuisance on the basis that the trial judge erred by concluding that the nickel in the soil caused a “material injury to property”. The Court held that to prove nuisance, the class was required to show that Inco's actions amounted to an “interference” with their properties. This “interference” could be in the form of (i) an interference with the use or enjoyment of the property (which the class did not allege) or (ii) a physical injury to the land. The Court went on to explain that physical injury to land requires more than trivial injury and, instead, requires actual, substantial, physical damage. For example, proof that the nickel in the soil posed a risk to the health or wellbeing of the residents would satisfy this requirement but mere concerns about health risks were insufficient to establish actual, substantial, physical damage. Without any evidence on the health impacts, the class failed to satisfy the Court that there was a physical injury.
However, the Court left the door open to claims of physical injury without health effects. The Court held that “a change in the chemical composition must be shown to have some detrimental effect on the land itself or rights associated with the use of the land”. Accordingly, if the class had shown that Inco's emissions had rendered their properties unfit for the purpose for which they had purchased them, it would have been possible that they could have established their claim. Given that the subject properties were still being used as residences, the class would have been unable to satisfy this test.
The doctrine of strict liability, which was first articulated in the UK case Rylands v. Fletcher, provides that anyone who makes a non-natural use of their land and brings something onto their lands that is likely to do mischief if it escapes must compensate anyone else harmed by the escape of that thing, regardless of whether they were diligent. At trial, Mr. Justice Henderson concluded that Inco's use of its property as a refinery was a “non-natural” use because nickel had been brought onto the land by Inco and was not naturally found on the property. The Court disagreed with the trial judge's analysis. Instead, the Court held that the non-natural use analysis is not strictly tied to whether something is brought on to the property that is not found naturally on the property. Rather, the question that must be asked is whether the operation of the refinery at the time and place and in the manner that it was operated was a non-natural use of Inco's property. This new analysis imposes, in our view, a highly subjective analysis that incorporates part of the negligence analysis (i.e., do the actions fall below a standard), which limits the doctrine's strict application.
The trial judge had also attempted to expand the principle of strict liability for “abnormally dangerous activities” to cover all losses generated, even when the activity is conducted with reasonable care. The Court of Appeal rejected the trial judge's characterization of the tort as it applied to “extra-hazardous” activities. The Court clarified that strict liability does not necessarily apply to all of the risks associated with carrying out of an activity; rather, it applies only to “escapes”. The Court of Appeal indicated that if Ontario law is to impose strict liability based solely on the nature of the activity, as the trial judge had implied, such a decision is better left to the Legislature.
The Court also addressed the requirement that there be an escape and noted that an escape is an accidental and unintended consequence of engaging in an activity. The emissions from the refinery were the intended consequence of the industrial activity. Accordingly, they were not “escapes” and therefore did not attract strict liability.
Given the Court's commentary on the “non-natural user”, it would appear that many situations which would have historically given rise to a strict liability claim may no longer ground this cause of action in Ontario. For example, an unintended leak from an underground fuel tank at a residential gas station was the typical case in which the doctrine of strict liability would apply regardless of how the gas station was being operated. However, the Court's decision in Smith v. Inco opens up the possibility that the owner of the gas station would no longer be strictly liable for the escape if the gas station was being operated in a manner that was consistent with the community standards.
When Mr. Justice Henderson released his trial decision, many observers thought that this would open the door more widely to environmental class actions in Ontario. But, in light of the Court of Appeal's decision, this door has significantly closed. Given reports that the class is seeking leave to appeal to the Supreme Court of Canada, this may not be the last word in Smith v. Inco.