Can environmental claims be carved out of the indemnity cap?

An indemnity cap is a number or limit the parties choose, so nothing prevents a buyer from asking that environmental claims sit outside it. The seller may say no, offer a higher separate limit, or ask for a shorter claims window. Treat the request as a negotiation, not a right. The more useful question is why a buyer might want environmental claims set apart, and part of the answer lies in how the statutes are drafted.

Why these claims differ

Ontario’s Environmental Protection Act, s. 18(1), lets the Director, in the circumstances in s. 18(2), order by written order a person who owns or owned, or who has or had management or control of, an undertaking or property to take specified steps. Under s. 18(2), the Director may make the order on reasonable and probable grounds that its requirements are necessary or advisable for the purposes listed there. The provision is framed around ownership and control and says nothing about how a sale agreement allocates risk. In those circumstances an order can reach a past owner as well as a current one, subject to limits elsewhere in the Act; for example, s. 168.18 restricts orders to a secured creditor that becomes owner by foreclosure, for a period and with exceptions.

Other provinces run their own rules

Alberta’s Environmental Protection and Enhancement Act defines a person responsible for a contaminated site, and the definition includes, in the circumstances it sets out, a previous owner. British Columbia’s Site Remediation Program regulates contaminated sites under the Environmental Management Act and the Contaminated Sites Regulation. So the scope of the carve-out should follow the province where the property sits, and a lawyer there should word it.

What a buyer can ask for

• A definition of environmental claim that names what it covers, such as government orders, cleanup costs and third-party claims.
• A separate cap, or none, for those claims, and a survival period that matches how long a problem could take to surface.
• A baseline assessment attached to the agreement, so conditions at closing can be shown later.
• Security for the promise, such as a holdback or escrow, because a carve-out against a seller who no longer exists or cannot pay is worth little.