CHAPTER 4 REDUCING THE LEGAL EXPOSURE OF OFFICERS, DIRECTORS AND EMPLOYEES

• Jurisdiction: United States

Corporate Environmental Management
(Feb 1993)
CHAPTER 4
REDUCING THE LEGAL EXPOSURE OF OFFICERS, DIRECTORS AND EMPLOYEES
Paul J. Hemschoot, Jr.
Amax Gold Inc.
Golden, Colorado

With increasing frequency, courts are finding individual liability for officers, directors and employees of a corporation resulting from the corporation's violation of various environmental laws. This liability has arisen under the Clean Water Act¹ , the Resource Conservation and Recovery Act² ("RCRA") and the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended³ ("CERCLA"). Moreover, liability has been assessed not only in civil proceedings but through criminal prosecutions as well.⁴ A number of commentators applaud this result⁵ , arguing that only by imposing direct liability on corporate officers and directors can one be assured that they will be vigilant with respect to the environmental laws in their conduct of the corporation's business.

Liability for environmental offenses⁶ is premised on several theories. It is, of course, easy to find a corporate officer, director or employee liability civilly or criminally if he or she was an active participant in the corporate acts which violated the law⁷ . In cases where such active participation is not evident, most courts have nevertheless found liability premised on the doctrine of the "responsible corporate official", first evidenced in 1943 in the United States Supreme Court decision in U.S. v. Dotterweich⁸ , and subsequently confirmed in the 1975 United States Supreme Court decision of U.S. v. Park⁹ . Both of these case arose under the Food, Drug and Cosmetic Act¹⁰ and a major factor in imposing liability was the court's concern that the nature of the statute required strict liability to protect public health. Some courts and commentators believe that the nature of the various environmental laws are of similar import to justify the imposition of individual liabilities on corporate officers and directors irrespective of proof that they knowingly participated in the corporation's violation of the laws¹¹ . This standard of the "responsible corporate officer" is specifically incorporated into the definition of person in the Clean Air Act¹² and the Clean Water Act¹³ . It may not be difficult to adopt this doctrine with respect to civil liabilities or where liability is premised on negligent discharges but the criminal provisions of RCRA¹⁴ for example speak in terms of a knowing acts in violation of the statute which suggests an awareness and failure to discharge an affirmative duty imposed under such law. To my mind, it is difficult to ignore the evident intent of the statute to require proof of knowledge of the violation by substituting a doctrine of holding strictly liable any "responsible corporate official"¹⁵ . Nevertheless, a number of courts have adopted the Park ¹⁶ and Dotterweich ¹⁷ reasoning to find individual liability and it would be imprudent to assume that an officer or director can escape individual liability by simply not knowing what is going on within the corporation¹⁸ . In some cases arising under CERCLA, courts have found liability for officers and major shareholders of corporations without even adopting the doctrine of the responsible corporate official¹⁹ . Moreover, in at least one of these cases the court specifically notes that the doctrine of piercing the corporate veil is not viewed favorably by the courts²⁰ . While there may still be cases involving close corporations where a court would be willing to pierce the corporate veil²¹ to establish individual liability, the rationale adopted by several courts arising out of CERCLA have simply sidestepped that issue and found individual liability simply from the active participation in the corporation's affairs²² . Some courts have, in fact, confused the acts of the corporation as a "person" or an "owner or operator" under CERCLA with the acts of the individual officer and found liability on the officer as a person subject to CERCLA²³ .

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In Canada the legislature and courts have gone one step further. Under Ontario's Environmental Protection Act²⁴ and the Ontario Water Resources Act²⁵ , every director or officer of a corporation that engages in an activity that may result in a discharge in violation of the Act may be liable for failing to "take all reasonable care to prevent the corporation from causing or permitting such unlawful discharge". Similar provisions have been written into the Pesticides Act²⁶ , the Mining Act²⁷ and the Ontario Health and Safety Act²⁸ . In a decision last year, the Ontario Court of Justice (Provincial Division) was faced with a question of what constitutes the duty to take all reasonable care to prevent the corporation from causing or permitting unlawful discharges under the Ontario Environmental Protection Act as it then existed²⁹ and the Ontario Water Resources Act as it then existed³⁰ . While that decision is of dubious precedential value, particularly for those who do not do business in Ontario, it does present an opportunity to observe the factors which a court may consider in determining individual liability of officers and directors.

The Bata Decision³¹

In the decision of the Ontario Provincial Offence Court in the County of Hastings, one may find some guidance (at least for those doing business in Ontario, Canada) as to what is expected of directors and officers with respect to the exercise of due diligence to prevent the commission of environmental offenses by the corporation. The corporation, which was one of 80 related companies operating around the world, was headquartered in Toronto and operated a shoe manufacturing division at Batawa, Ontario. In its operations it used a number of toxic chemicals, the residuals of which were stored in barrels which had been allowed to accumulate over time on the plant site. A number of the containers were in varying stages of decay, many were uncovered and exposed to the elements and there was evidence of leakage into the ground and groundwater. The corporation and three directors, who were also the Chairman and Chief Executive, the President, and a Vice President who was the General Manager of the operation in question, were charged under the Ontario Water Resources Act³² ("O.W.R.A.") and the Environmental Protection Act³³ of Ontario ("E.P.A.") with various offence arising from the alleged discharge of contaminants into the environment³⁴ . There was no secretive or malevolent acts alleged on the part of the corporation or any of its directors/officers³⁵ nor was there any evidence that the affected environment was of any unique significance³⁶ . In fact, the court found a number of mitigating factors on the part of the corporation in imposing sentence³⁷ . The directors/officers were charged with failing to take all reasonable care to prevent a discharge contrary to Section 71(1) of the E.P.A.³⁸ It must be noted that there are specific provisions in these Acts imposing a duty on directors and officers of a corporation that engages in an activity that may result in a discharge in violation of these Acts to take "all reasonable care" to prevent the corporation from causing or permitting such unlawful discharge³⁹ . The corporation was ultimately convicted of causing or permitting a discharge of liquid industrial waste in violation of Section 16(a) of O.W.R.A. as a result of spillage from the deteriorating drums into the ground and ground water⁴⁰ . With respect to the issue of directors/officers liability, the Chairman and Chief Executive was acquitted on the basis of his limited personal contact with the plant in question. The Court seemed convinced that the Chairman/CEO had discharged his duty of due diligence by issuing a Technical Advisory

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Circular, with particular attention to environmental concerns, to his worldwide organization about three years before the condition on the site was observed by officers from the Ministry of the Environment. The Court characterized the TAC as "a very comprehensive document" and noted that it specifically recommended addressing an assessment of environmental exposure and reduction of potential risks⁴¹ . That was not all, however; the Court took note of the Chief Executive's prompt response to other environmental concerns which were called to his attention⁴² . It also noted that he had placed an experienced director/officer on site and was entitled to assume that his delegate was addressing the environmental concerns and would bring to his attention any problem as others had done with respect to other property. The TAC was evidence of a system and the Chairman/CEO "was entitled to rely upon his system" ... unless he became aware the system was defective⁴³ . The Court nevertheless observed that because Bata Industries Limited is a privately held company much of the business done at Directors' meetings or between the Board and the Division was informal with no records kept. The court warned "It is very difficult in the ordinary course for a Director to establish due diligence if there is no contemporary written record"⁴⁴ .

The President of Bata Industries Limited was not as fortunate. There was testimony that he was at the plant site once a month and the plant manager had brought the problem to his personal attention nearly six months before the condition was first observed by officials of the Ontario Ministry of the Environment⁴⁵ . Although the prior plant manager had obtained quotes from a waste disposal company for removal of the barrels of waste more than six months before they were first observed by Ministry officials, no contract was issued until after the problem had been noted by Ministry officials on the site. There was also no evidence that the President took any action to assess the problem after he had actual...