The unanimous decision by a three member panel that heard the case will also require the Trudeau government to restart its consultations with First Nations about the project, before construction can proceed.

The decision, announced Aug. 30, is the first major court defeat for the project, requiring the government to ask the federal energy regulator or its successor to redo a federal environmental evaluation and correct a “critical” mistake it made to ignore the consequences of increased oil tanker traffic off the coast of British Columbia.

The Federal Court of Appeal has quashed the federal government’s approval of the troubled Trans Mountain expansion project, after concluding that Prime Minister Justin Trudeau’s cabinet made its decision without considering all evidence and failing in its legal duty to consult First Nations.

“With rare exceptions, Canada did not dialogue meaningfully with the Indigenous applicants about their concerns about the Board’s review. Instead, Canada’s representatives were focused on transmitting concerns of the Indigenous applicants to the decision-makers and nothing more. Canada was obliged to do more than passively hear and receive the real concerns of the Indigenous applicants.”

“Indeed, a review of the record of the consultation process discloses that Canada displayed a closed-mindedness when concerns were expressed about the Board’s report and was reluctant to depart from the findings and recommendations of the Board,” said Dawson in the ruling.

Justice Eleanor Dawson, on behalf of the panel, wrote that the government took an "unreasonable" approach to consultations that didn't allow for a meaningful or adequate two-way conversation with the affected First Nations, in the months before it approved the project. She also criticized the government for making its decision based on inadequate evidence from the report prepared by the NEB, which failed to allow participants to cross-examine the Texas company officials about their evidence and testimony during its review.

Conservationists have also warned that the project threatens the survival of a few dozen southern resident killer whales that were already at risk, a concern that was acknowledged by the National Energy Board (NEB), following public hearings to review the pipeline expansion.

The ruling confirms longstanding criticism from affected First Nations that the Trudeau government took a "paternalistic," "unrealistic," and "inadequate" approach to consulting them, failing in its legal duty under the Constitution. The Tsleil-Waututh Nation, which occupies unceded territories in what is now known as the Burrard Inlet in the Vancouver region, and other affected First Nations launched the case almost immediately after the Trudeau government approved the project in November 2016.

Morneau indicated it was too early to say whether an appeal was in the works, but said that the court decision demonstrates that the government made the right decision to purchase the project. He explained that there were too many political risks and delays to allow a private company to proceed on its own.

We have received the ruling by the Federal Court of Appeal, and are taking the appropriate time to review the decision. I’ll be speaking to reporters regarding the Trans Mountain Expansion Project later today. https://t.co/r5z9qKraZs

"The parties expect to close the transaction as early as Aug. 31, 2018," the company stated.

Morneau and Kinder Morgan both said the deal was expected to close within a day after shareholders in Kinder Morgan Canada Ltd. gathered in Calgary, shortly after the ruling was released, and voted 99.98 per cent in favour of the $4.5 billion sale to Canada.

The government also has the option to appeal the decision, which comes three months after it announced a deal on May 29 to spend $4.5 billion to buy Kinder Morgan Canada's (KML) existing pipeline and the expansion project. It ordered one of its Crown corporations, Export Development Canada, to help arrange the multi-billion-dollar purchase.

Despite the major setback, Finance Minister Bill Morneau told reporters outside his Toronto office that the government was still planning to purchase the project and related assets from their Texas owner, Kinder Morgan, and proceed with addressing issues identified in the ruling "promptly" as the court directed.

The ongoing delays could drive up the costs of completing the project, previously estimated by Kinder Morgan to cost $4.1 billion to build, but now expected to cost at least $13.8 billion. This total is on top of the billions to be spent by the government to purchase the Kinder Morgan assets.

"Our next step is to close on the acquisition of the project. We expect that will happen as early as tomorrow."

1/x: Statement on today's Trans Mountain decision: Today is a sad day for Canada and our ability to move major projects in the national interest forward. — Jason Kenney (@jkenney) August 30, 2018

In Alberta, Premier Rachel Notley, who has vowed to get the pipeline expansion project built, announced at a news conference on Thursday evening that Alberta was pulling out of the federal climate plan until Ottawa could "fix" the "crisis" caused by the Federal Court's ruling.

"Now, more than ever, we need to come together and prove to ourselves and to the world that our country works," Notley said. "This ruling is bad for working families. And it is bad for the economic security of our country."

Alberta Opposition Leader Jason Kenney quickly blamed the courts.

"Today’s ruling makes it abundantly clear that the Federal Court of Appeal has no regard for the real-world economic impact this decision will have on ordinary Canadians’ lives and livelihoods," he tweeted.

In comments to reporters, he said the judiciary "needs to understand that these are not academic questions."

"People are going to lose their jobs. Businesses are going to go down. First Nations will lose the opportunity to generate wealth for their people as a result of today's decision. Do they even care about that when they balance out competing interests in these decisions?"

Kinder Morgan Canada President Ian Anderson sits down for an interview in Calgary on May 26, 2016. Photo by Jeff McIntosh / The Canadian Press

Trans Mountain to suspend construction

The head of Kinder Morgan Canada said that the company planned to suspend construction as a result of the ruling.

"We are reviewing the decision with the Government of Canada and are taking the appropriate time to assess next steps," said the company's president, Ian Anderson, in a statement.

"We remain committed to building this project in consideration of communities and the environment, with meaningful consultation with Indigenous peoples and for the benefit of Canadians. Trans Mountain is currently taking measures to suspend construction related activities on the project in a safe and orderly manner. The court decision was not a condition of the transaction between KML and the federal government."

Morneau also stressed that the Trudeau government had inherited a flawed system for reviewing industrial projects from former prime minister Stephen Harper, and that it was taking steps to resolve those issues.

The Trudeau government has introduced legislation to reverse many changes, adopted by Harper's government to reduce federal environmental oversight. If adopted, the legislation would also replace the NEB with a brand new energy regulator.

In Victoria, B.C. Premier John Horgan was all smiles as he greeted reporters to react to the news.

"It's not about winning and losing. It's about the rule of law," said Horgan who has expressed his opposition to the Trans Mountain project.

He said the ruling confirms that the federal government didn't adequately consider the threats to the coastline before it approved the project.

Khelsilem, councilor and spokesperson for the Squamish Nation, on May 2, 2018 at a conference near Ottawa. He said Thursday that the Trudeau government "failed in its rhetoric about reconciliation." Photo by Alex Tétreault

'A major legal victory'

Chief Maureen Thomas of the Tsleil-Waututh Nation said in a statement she was pleased to see the court's decision.

“We went into consultations with the federal government with open hearts and minds, but sadly the process could best be described as window dressing," said the chief.

"We had a strong sense that the decision had already made before we even sat down. It was clear from the timing of the decision that they did not meaningfully consider much of the information we provided. The court has agreed with us on every issue."

#FCA quashes the #TMEX approvals. Marine shipping illegally excluded and consultation "well short of the mark set by SCC." TWN is pleased that the FCA has recognized our inherent governance rights. Join us for further comment and to hear what comes next at 9:30am at CRAB park. — Tsleil-Waututh Nation (@tsleilwaututh) August 30, 2018

The Coldwater Indian Band, which asserts Aboriginal rights and title to an area where the pipeline system touches, also said in a statement it had "won a major legal victory today in its fight to protect its drinking water and sacred areas."

“This is a major victory for my community. Until now our rights and our water have been disregarded by Kinder Morgan and the Government of Canada,” Coldwater Chief Lee Spahan is quoted as stating.

“Thankfully, the court has stepped in where Canada has failed to protect and respect our rights and our water. Our members will be hugely relieved.”

The ruling states that Canada "failed to meaningfully engage with Coldwater" and discuss options to deal with concerns over drinking water.

NDP Leader Jagmeet Singh walks out of the National Press Building in Ottawa on Aug. 30, 2018. Singh said both Trudeau and Harper were "directly responsible" for the flaws pointed out in the ruling. Photo by Alex Tétreault

Vancouver Mayor Gregor Robertson said the legal ruling validated the city's concerns that Indigenous peoples were not adequately consulted. "This decision is a monumental win for the rights of Indigenous peoples and all of us who stand with them in firm opposition to a project that would massively increase climate pollution and put our coast at huge risk of oil spills," he said.

Khelsilem, councilor and spokesperson for the Squamish Nation, which asserts traditional territory in an area where pipeline infrastructure would be located, celebrated the court’s ruling "in favour of our Indigenous rights" in a separate statement.

"The Trudeau government failed in its rhetoric about reconciliation with First Nations’ and this court decision shows that," he said.

"This decision reinforces our belief that the Trans Mountain Expansion Project must not proceed, and we tell the prime minister to start listening and put an end to this type of relationship," added Khelsilem. "It is time for Prime Minister Trudeau to do the right thing."

Conservative Party Leader Andrew Scheer said the latest news made the issue a "complete failure" for Trudeau, that would also wind up costing taxpayers.

"Obviously, this is devastating news for energy workers across Canada and for Canadian taxpayers," Scheer said, adding that taxpayers would now spend billions without any plan to complete the project. "Today, we find out that the goal posts have been missed again by the Trudeau government. So they're going to have to answer those questions (about how to complete the project.)"

Speaking Thursday at the National Press Theatre in Ottawa, NDP Leader Jagmeet Singh said both Trudeau and former prime minister Stephen Harper were "directly responsible" for the flaws highlighted in the ruling.

Trudeau campaigned on the issue, said Singh, and his government could have sufficiently updated the process when it came to power.

“They knew that this was a problem, they could have rectified the situation and they didn’t,” he said. “They didn’t listen to people’s concerns, they ignored First Nations, they didn’t consult in a manner that was respectful...they didn’t take into consideration massive environmental concerns.”

The NDP leader added the pipeline was not in the country’s interest, and said public dollars should be directed to renewable energy projects instead.

Finance Minister Bill Morneau reacts to the Federal Court of Appeal decision outside his office in Toronto on Aug. 30, 2018. Morneau said he was "taking the appropriate time to review the decision." Photo by Steph Wechsler

'Unjustified failure'

If built, the Trans Mountain expansion would triple the capacity of an existing pipeline system, allowing it to ship up to 890,000 barrels of bitumen and other petroleum products from Alberta’s oilpatch, to a Burnaby terminal in metro Vancouver.

The federal and Alberta governments, along with oil companies, say it would generate growth by giving oilsands producers access to new markets on the Pacific Ocean. Dozens of affected Indigenous communities, environmentalists and some municipalities along the route have argued that the project is too risky and would push Canada’s climate change goals out of reach.

The ruling acknowledged that the government had attempted to address concerns about oil tanker shipping with its Oceans Protection Plan, but that this failed to address their legal requirement to ensure that the NEB had considered this during its review.

The FCA’s decision in Tsleil-Waututh Nation et al. v. Attorney General of Canada et al. (pertaining to the Trans Mountain pipeline) is available at the following link: https://t.co/Q7c5wUJPFd — Federal Court of Appeal (@FedCourtApp_en) August 30, 2018

“The unjustified failure to assess the effects of marine shipping under the Canadian Environmental Assessment Act, 2012, and the resulting flawed conclusion about the effects of the project was so critical that the Governor in Council could not functionally make the kind of assessment of the project’s environmental effects and the public interest that the legislation requires.”

The ruling also noted that the Trudeau government gave First Nations only a few weeks to review a voluminous report that summarized all of the efforts it was supposedly taking to accommodate them.

“The inadequacies of the consultation process also flowed from Canada’s unwillingness to meaningfully discuss and consider possible flaws in the Board’s findings and recommendations and its erroneous view that it could not supplement or impose additional conditions on Trans Mountain,” said Dawson's ruling.

“Canada is not to be held to a standard of perfection in fulfilling its duty to consult. However, the flaws discussed above thwarted meaningful, two-way dialogue. The result was an unreasonable consultation process that fell well short of the required mark.”

with files from Emilee Gilpin, Steph Wechsler, Matthew McClure and Michael Ruffolo.

Editor's note: This article was updated at 2:40 p.m. ET on Aug. 30 with additional quotes, reaction and background.