Uncertainty on the Environmental Assessment Front

How will Canada’s changing environmental legislation affect regulatory law and litigation?

In February 2018 Bill C-69, which would amend two federal environmental acts, was introduced in Parliament; on June 20th the bill was passed by the Senate, though not without controversy.

And back in January the Supreme Court of Canada had ruled that a bankrupt oil and gas company in Alberta had to fulfill provincial environmental obligations before paying its creditors. Along with a Federal Court of Appeal ruling in August 2018 that found insufficient consultation had been done with Indigenous peoples in the construction of the Trans Mountain Pipeline extension, the past year has seen notable rulings – and legislative changes – affecting environmental law in Canada.

“There’s still a lot of uncertainty over how the environmental assessment process is going to work under Bill C-69,” says Shawn Denstedt, Vice Chair of Western Canada at Osler, Hoskin & Harcourt LLP, from his Calgary office. Denstedt travels extensively in his job, particularly in Asia, and has found the outcome of this bill continues to be a hot topic for potential investment in Canada.

“What will the regulatory system look like and how will it work? How will it impact investment? I think with investors there's a wait-and-see attitude,” he says. “People who might invest in Canada say, ‘until Canada sorts itself out, we're going to sit on the sidelines.’ I think that is the number one trend or issue facing investment in Canada right now.”

Bill C-69, An Act to enact the Impact Assessment Act and the Canadian Energy Regulator Act, to amend the Navigation Protection Act and to make consequential amendments to other Acts, was opposed by the energy sector. It will affect how major infrastructure projects are reviewed and approved in Canada through the creation of the Impact Assessment Agency that will oversee project evaluations. It also replaces the National Energy Board with a new Canadian Energy Regulator; and an amended federal environmental assessments process will see a new Ottawa-based Impact Assessment Agency review a range of environmental impacts.

The Canadian Association of Petroleum Producers, for one, expressed concern that the proposed legislation would create greater regulatory uncertainty and litigation risk. Denstedt agrees.

“Bill C-69, even with the amendments, in my view, will not solve the uncertainty issue in relation to environmental assessment; it may make it worse” he says. The bill eviscerates the expertise available under the Calgary-based National Energy Board for regulating energy projects by separating the environmental review from the NEB’s mandate, he believes.

“The problem with that separation is the people who are best equipped to understand the impacts of energy development are no longer charged with that obligation.”

The National Energy Board was created as an expert regulator to understand and regulate all aspects of the energy business, from economic to environmental to safety to social aspects, says Denstedt, “and by separating those functions we're doing the opposite of what sustainable development really means, which is to integrate those [environmental] considerations into decision-making processes.”

Under Bill C-69, a new Impact Assessment Agency will look at the environmental assessment of a project, and the National Energy Board will then look “at the energy side of it,” says Denstedt; “so you’ve … pulled those two pieces apart.”

The potential for larger fines has also increased significantly in environmental prosecutions, particularly under the Fisheries Act and the Migratory Birds Convention Act (MBCA), since increased penalties were introduced in 2013 and 2017, says Brad Gilmour, a partner at Bennett Jones LLP in Calgary.

“The trend over the last decade is upward in terms of increasing inspections, prosecutions, and amendments to legalisation to increase penalties,” Gilmour says. Under the two Acts noted above, maximum fines have increased significantly, he adds; for example, if the Crown chooses to proceed summarily for a second offence the fines could reach as high as $8 million, with the potential to multiply by the number of days an environmental incident is not successfully managed.

The trend has crystallized into considering five sentencing factors, Gilmour adds: culpability, prior record, damage or harm, remorse, and deterrence. “The courts have said the most important is culpability, which goes back to having proper procedures in place [to] prevent an incident from occurring” in the first place; this will provide a defence and may lower the penalty. “Due diligence is key.” The second most important factor would be the degree of damage or harm, he says.

Rosalind Cooper, an environmental lawyer at Fasken Martineau DuMoulin LLP in Toronto, has also observed an uptick in numbers of prosecutions under the Fisheries Act in particular, though it is “a trend you continue to see over time,” and penalties have been much higher in the United States. “I think we’re consistent in the sense that we’re focused on enforcement,” and penalties have generally increased in conformance with that, she says.

Lawyers have also been discussing with their clients the implications of the Supreme Court of Canada’s January ruling in Orphan Well Association v. Grant Thornton Limited on companies doing business in the oil patch, or elsewhere where environmental issues may be at play.

The implications of the decision in which the Supreme Court ruled that the trustee for the bankrupt Redwater oil and gas company in Alberta couldn’t walk away from its disowned sites, and that provincial environmental obligations must be met before Redwater’s creditors were paid are significant, says Cooper. Initially, the decision was thought to be specific to Alberta statutes and its requirements for cleaning up exhausted oil wells; oil and gas companies there cannot transfer licences without permission from the Alberta Energy Regulator, which requires that environmental obligations have first been met.

“I think that may be underestimating the importance of the decision,” Cooper says, and how it may translate to other regulators across Canada. “With some matters I’m dealing with [regarding] insolvency, regulators in Ontario have been looking at Redwater, and thinking they have enhanced powers now.” The Supreme Court’s commentary in this decision indicates that its ruling in the Redwater matter “applies across the board, to all sorts of insolvency situations,” and suggests that the environment takes priority where assets are limited, she notes.

This makes it important for lenders to take a hard look “at the nature of the business that’s being undertaken, and potential environmental risks,” she says, including obligations at closure time for mines, for example. Lenders must consider environmental obligations that will accrue to a particular company at the end of day, as a super-charge from a regulator will affect the ability of lenders to recover.

“So, more due diligence will be done,” as it should be, says Cooper. “Does the mining company have a closure plan? What are the types of obligations that will occur at the end of the life of the mine, and is there comfort that there’s adequacy in that regard? Has a peer review been done? Do we need something else, to give comfort that that’s enough?” Regulators are referring to the decision and the enhanced powers they believe it gives them, she adds.

From a policy perspective, the decision in Redwater was the right one, says Osler’s Denstedt, as the public purse was the last to have to pay for Redwater’s cleanup. The policy behind the decision was that if lenders have the ability to do due diligence on the companies they lend money to, during bankruptcy proceedings they should not be able to disclaim the assets that have no value or that have liabilities attached that could have been discovered during due diligence. This could have a chilling affect on lending in situations where it’s harder to discover liabilities, he adds.

“The energy industry has already been on a downturn for the past few years; this is one more concern we have” regarding the future of the energy sector.

However, Denstedt notes, in the Redwater case both the Alberta Court of Appeal and the Supreme Court of Canada commented on the need for clarification from a policy perspective in the Bankruptcy and Insolvency Act, which allows a trustee to walk away from environmental obligations.

In Tsleil Waututh v. Canada (Attorney General), the Federal Court of Appeal (FCA) considered the duty to consult in the current federal regime for review and approval of interprovincial pipelines. In its decision in August 2018, the FCA quashed the federal government’s approval of the Trans Mountain Pipeline expansion, which would facilitate bringing oil from Alberta’s oil sands to the British Columbia coast, in part due to Canada’s failure to fulfill its consultation and accommodation obligations to Indigenous peoples.

The decision had “high-level impact,” says Julie Abouchar, a partner in Willms & Shier Environmental Lawyers LLP in Toronto, and lawyers across Canada have taken two key points from that decision.

“Most important is the need for an indigenous consultation prior to getting a project approved. One of the reasons why the FCA … quashed the approval was because it found that the government had not implemented Indigenous consultation properly. At the highest level, what the FCA is saying is, meaningful two-way dialogue is necessary, including responding to and addressing Indigenous concerns.”

The expectation that there be agreement with Indigenous communities before major projects are approved is not as common in the United States, she says, but “with large projects in Canada, the successful ones have agreements with Indigenous communities.”

In British Columbia, where the appellants launched the case, there is no legal requirement to reach agreements, but this varies from province to province, Abouchar says.

Under the Canadian Environmental Assessment Act, parties must look at the ancillary parts of a project, such as whether or how marine life might be affected by increased tanker traffic. In this case, the National Energy Board was found to be in error in not considering the ancillary impact of endangered species from increased shipping of oil from the B.C. coast.

“All that is very interesting, because the landscape of environmental assessment is changing,” she says which includes the Senate passing Bill C-69.

Editor's note: This story has been updated from the version that appeared in the June 2019 issue of Lexpert to reflect the Senate passing Bill C-69 later that month.