Contamination and contracts: managing risk

Last week, I received an email from a lawyer who said their client:

“Will not accept responsibility or indemnify for Contamination that has occurred prior to the ‘Acquisition Date’. Under section 6 (s6) of the Contaminated Land Management Act 1997, responsibility for contamination or for any harm caused by contamination cannot be transferred by contract or other arrangement.”

While the commercial position is understandable, the reliance on s6 is misplaced. Here’s why:

Land contamination is a difficult risk to manage in a transaction because:

  • it is difficult, costly and time-consuming to define the risk
  • the risk is long-term often arising some time in the past but manifesting itself at an unknowable time in the future
  • of the costs of works to respond
  • of the desire on the part of sellers to make a clean break in the transaction versus the desire of the purchaser not to take on an unquantified risk that they did not create.

Typically the risk has to be managed by releases and indemnities.

Put simply:

  • a release is a promise not to pursue a claim – in its nature it operates to release the liability of Party A to Party B where they are both parties to the contract
  • an indemnity is a promise to pay if an event within the scope of the indemnity occurs – for example where Party A indemnifies Party B, it creates a liability for Party A to Party B if some third-party (not party to the contract) asserts rights against Party B.

The parties to a transaction face a number of risks from contaminated land. For example, the seller may have caused the contamination and may:

  • be liable to the purchaser
  • be liable to neighbours whose land has been damaged
  • have injured people on the site or neighbouring sites
  • be able to be served with regulatory orders or even prosecuted.

For the seller, concerns may include:

  • they may not be able to use the land, or may have to incur costs cleaning it up
  • as owner they may be liable to regulatory orders or prosecution
  • as the new operator of the site they may contribute to harm to neighbours or people on the site.

A release might operate for example by the purchaser releasing the seller from any claim by the purchaser in respect of the condition of the site. An indemnity might be that the seller will pay any costs, expenses or losses incurred by the purchaser in remediating the land to an agreed condition.

Neither of these concepts says anything about whether the regulatory authorities can serve notices or take other actions against either the seller or the purchaser. They simply allocate a portion of the cost consequences if that were to occur.

So back to where we started…Subsection 6(6) of the CLM Act says:

Radiation-hackey

“A person who is responsible for contamination continues to be responsible for that contamination under this Act whether or not the person has entered a contract or other arrangement that provides for some other person to be responsible for the contamination or for any harm caused by the contamination.”

The above does not detail whether or not a person responsible can seek an indemnity or a release from a counter party to a contract. At its highest, it is saying that a contractual transfer of obligations does not release the responsible party for the purposes of the Act i.e. the EPA can still serve orders despite what is in private contracts.

What to consider

When drafting releases and indemnities and releases, explore:

  • allocation of liability relative to the acquisition date – when was the contamination caused, when was the contamination discovered or manifest and when did the contamination move off site
  • allocation of liability relative to who is best place to control the consequences
  • time bars for making claims
  • claims process
  • onus of proof – who has to prove which elements of a claim or defence
  • caps on amount
  • authority to give the indemnity or release
  • impact on insurances
  • standards of remediation to be achieved
  • proof of base line conditions.

Subsection 6(6) shouldn’t factor in your thinking…

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