Navigating the maze of environmental liabilities

Mondial Publication March 13, 2017

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:

  1. There is an obligation to comply with a duty of care to protect the environment.  The duty of care applies to various listed persons (ie responsible persons) including landowners, persons in control of land, land occupiers or users, and persons responsible for causing significant pollution or degradation to the environment.  The duty of care requires that all reasonable measures are implemented to prevent pollution or degradation, or where such pollution or degradation cannot be prevented, to minimise or rectify the pollution or degradation.  Failure to satisfy the requirements of the duty of care may result in administrative enforcement action by regulators responsible for environmental management.
  2. Liability is strict.  The obligation to take reasonable measures as required in terms of the duty of care is on a no-fault basis (ie negligence or intention is not a requirement to establish liability to comply with the duty of care).  In certain instances, a person may be liable for remediation where it is not the cause of the pollution or degradation.  For example, a landowner is jointly and severely liable with a tenant who pollutes the land for failing to take reasonable measures to investigate and remediate the pollution. 
  3. Liability is retrospective. Contrary to the general principle that legislation does not operate retrospectively, the National Environmental Management Act, 1998 expressly applies to pollution or degradation that occurred before its commencement on 29 January 1999.  Therefore a responsible person may be liable for the remediation of pollution and environmental degradation caused by another person decades ago.
  4. Piercing the corporate veil.  Directors of a company are jointly and severally liable for any negative impact on the environment, whether advertently or inadvertently caused by the company they represent.  Directors may also incur personal criminal liability for in respect of various statutory environmental offences committed by the company they represent.

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.

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