Q&A with Claudia Salomon
We speak with Claudia Salomon, recently elected President of the ICC International Court of Arbitration, the first woman President of the ICC Court in its almost 100-year history.
According to the polluter pays principle, the person responsible for pollution should bear the costs associated with mitigating and remediating its effects. This principle is incorporated into South African law as a component of the principle of sustainable development. South African law however, casts a wider net in terms of holding persons responsible for the remediation of pollution and environmental degradation. Responsible persons include landowners, persons in control of land, and land occupiers or users whose land is polluted or degraded. Persons who have caused significant pollution or degradation, and responsible persons who have failed to fulfill remediation obligations also face exposure to criminal sanctions and civil claims. In the context of this liability regime, the disposal and acquisition of a business, whether through a sale of assets or shares, raises several environmental legal considerations. These considerations are relevant to both a seller and purchaser, and are a factor in the successful completion of the transaction and the mitigation of risk relating to current and contingent environmental legal liabilities.
Understanding environmental legal liability is therefore crucial. The interesting features of this liability under South African law are the following:
In corporate acquisitions and disposals, a sale of business arrangement would typically be used where one wants to leave liabilities in the target company. However, in the instance of certain environmental liabilities, one cannot simply do this. Liability for remediation of pollution may pass to a purchaser who acquires polluted land despite it not being the party that caused the pollution. In addition, one cannot simply contract out of or transfer statutory environmental liability. Therefore, environmental legal considerations should feature prominently in transactions where there is potential for environmental liabilities to have arisen in respect of the target business.
Consider Company A, a small logistics business, which is identified as a potential target for acquisition by Company B. Company B, having the view that the acquisition poses a low environmental risk forgoes undertaking a thorough technical and legal environmental due diligence investigation. The parties proceed by way of a sale of assets, which results in the whole business of Company A, including all immovable assets, transferring to Company B. Once paid and having distributed the purchase price to its shareholders, Company A ceases to operate and holds no assets. Unbeknownst to either party, five years previously hydrocarbons from an underground storage tank contaminated groundwater and soil below the property. The pollution plume is slowly migrating off-site towards a nearby river and water boreholes used by neighbouring businesses. A few years after the transaction completes, the pollution plume contaminates the river and boreholes. Company B is immediately faced with a reputational crisis when the media reports on the contamination. Regulators issue Company B with a compliance notice requiring it to undertake an assessment of the extent of the contamination and the implementation of a remediation plan. Civil claims are instituted by neighbouring industries to recover damages suffered as a result of the inability to utilise water from their boreholes.
In this example, Company B faces significant risk that has the potential to adversely affect its operations. The fact that it is not the polluter is irrelevant in assessing its liability for remediation. In the circumstances, it would hope to have recourse under the sale of business agreement to claim against Company A for the costs of remediation. However, the right for Company B to do so would depend on the provisions of that agreement. For example, if there was a breach of a warranty given by Company A regarding the status of the property, an indemnity that survived the intervening period, whether any security had been obtained from a related party (such as a shareholder or parent company) to cover such an event, or whether an escrow fund exists against which a claim can be made. In the absence of a contractual covenant backed by security that created such a right, Company B would have no recourse. It is thus critical that careful and due consideration is given to real and contingent environmental liabilities when negotiating corporate acquisitions and disposals. Appropriate warranties and indemnities should be included in the sale agreement on the basis of a sound due diligence. If necessary, a purchaser should obtain security from a related party such as a shareholder or the parent company of the seller to cover costs associated with environmental liabilities.
In September 2021, the Grand Chamber of the Court of Justice of the European Union (CJEU) published a much-anticipated decision in Moldova v Komstroy (Case C 741/19) (Moldova) concerning the validity of the investor-State dispute settlement mechanism in the Energy Charter Treaty (ECT).
© Norton Rose Fulbright LLP 2021