The March 11, 2011 earthquake that struck off the coast of northeast Japan, and the devastation of the subsequent tsunami, will surely leave myriad legal issues in its wake. Among them, the process of allocating the enormous costs involved in cleaning up the resulting environmental contamination. Though the scale of the disaster on the Pacific coast of Japan makes it a rare occurrence, it serves as a reminder of the various environmental risks and liabilities that may arise in the course of everyday business. Canadian companies wishing to open operations or acquire businesses in Asia should turn their minds to environmental risk exposure early and take steps to minimize such exposure.

Environmental liabilities may arise in any number of business circumstances and apply to a variety of corporate and individual actors. Companies can attract civil, or sometimes even criminal, liability in respect of their operations, and individuals may be found similarly liable for breaches of environmental laws in their capacity as directors, officers, or shareholders of a company. Environmental liabilities can arise in numerous ways, such as statutory criminal or regulatory offences, statutory civil liability, traditional civil claims such as trespass, nuisance or negligence, or through private contractual relations.  

An important step in reducing environmental risk is conducting detailed pre-transaction environmental due diligence. In the context of an acquisition, prospective purchasers should request access to all environmental studies, reports, permits, orders, key correspondence from regulatory authorities, and other critical environmental documents in order to identify problem areas and develop a strategy for addressing them through the transaction process and agreements.  

Once environmental issues have been identified, there are a number of ways in which subsequent agreements may mitigate with environmental risk. The allocation of environmental risk in any transaction depends on many factors, including the type and size of transaction, the sophistication and relative bargaining strength of the parties and the parties’ tolerance for risk. However, some common methods of risk allocation include the use of representations and warranties, and environmental indemnities granted by each party to the other. Acquisitions should seek to allocate environmental risks, such as contamination of real property, between the parties. A purchaser may wish to seek a broad representation as to the environmental condition of a subject property by the vendor, and possibly even representations regarding adjacent properties from which contamination could migrate. Such representations and warranties are often subject to time and dollar limits.  

Purchase agreements often include a release and indemnity by the purchaser of all other claims and indemnities for third party environmental claims. Other methods of environmental risk reduction can include the use of environmental insurance, and ensuring that new subsidiaries are operated and managed independently from the parent company in order to reduce the risk of shareholder liability.

Environmental issues can present difficult challenges in any transaction. However, recognition of those issues and careful planning and management will ensure those issues do not derail the transaction.