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Liability

Types of liability

What types of liability can arise for environmental damage (eg, administrative, civil, criminal)?

Environmental liability can arise under:

  • criminal law; 
  • civil law;
  • public or administrative law; and
  • company law.

In terms of its enforcement approach, the Environment Agency (EA) has traditionally regarded prevention to be better than a cure and has thus sought to engage with businesses to educate and enable compliance and offer information and advice to regulated persons. The EA has also committed to a proportional, consistent and transparent enforcement approach. However, its ability in this regard has been affected by significant budgeting constraints, which may have contributed to an impression of less predictable approaches to enforcement. The EA uses formal enforcement powers, such as issuing enforcement notices and bringing prosecutions in certain circumstances, often where:

  • significant damage has occurred or been narrowly avoided;
  • there is evidence of dishonesty or putting profit before compliance; or
  • there is a prior pattern of poor compliance practices.

In 2014 revised guidelines for the sentencing of environmental criminal offences significantly increased the financial risks associated with prosecution. These sentencing guidelines state, for example, that fines for organisations should meet the objectives of punishment, deterrence and the removal of gain derived through the offence.

The new sentencing regime provided for by the guidelines aims to ensure that sentences match:

  • the seriousness of the offence;
  • the resultant harm; and
  • notably, the perpetrator’s financial standing.

Fines will be calculated based on the financial information provided in the annual accounts of the past three years (with particular attention being paid to turnover). Under the guidelines, ‘very large organisations’ (ie, those with a turnover greatly exceeding £50 million) may be fined an amount necessary to achieve a proportionate sentence. The guidelines specify that any such financial order must be “sufficiently substantial to have a real economic impact which will bring home to both management and shareholders the need to improve regulatory compliance”.

Directors’ and officers’ liability

Can directors and officers be held personally liable for company environmental offences? If so, can liability be limited through insurance coverage and/or contractual indemnities?

Company directors, managers and officers can be prosecuted if a criminal offence is committed with their consent or connivance or is attributable to their neglect. However, the hurdle for the prosecution of individuals is relatively high and the prosecution must show that the defendant was in a position to control and guide the company’s strategy and policy. The formal delegation of management responsibility will help to protect directors from prosecution, but does not exclude the risk of prosecution. Liability does not usually extend beyond the legal entity responsible for the incident to a holding company unless there is clear evidence of de facto control, which is typically absent. Directors’ and officers’ insurance is widely available for successful defence costs; however, contractual indemnities for criminal liability are unenforceable under public policy.

Liability for authorised activity

Can environmental liability arise even in the course of authorised activities (eg, operations subject to environmental permits)?

Provided that an entity operates in compliance with its environmental permit, regulatory liability is unlikely to arise. However, third parties, including non-government organisations, can challenge the terms of an entity’s environmental permit through a judicial review and have an express right to request that regulators take action if:

  • environmental damage is occurring; or
  • there is an imminent threat of environmental damage.

It is a criminal offence to violate an environmental permit or the terms of an enforcement or suspension notice served on a permit holder. The regulator has a range of enforcement mechanisms available in relation to environmental permit violations, including:

  • serving an enforcement or suspension notice;
  • mandating that operators take certain steps where there is a high risk of pollution; or
  • undertaking an enforcement action where an accident or incident has significantly affected the environment, with any remediation costs being recovered from the operator.

If damage is caused to individuals or property, civil liability may arise in tort if it can be shown that a duty of care existed and that the harm was foreseeable. It is not a defence for such liability that the harmful activity was not in breach of regulatory requirements.

Clean-up obligations may also arise for damage to unowned land under the Environmental Damage (Prevention and Remediation) (England) Regulations 2015.

Defences

What defences are available to environmental offenders?

For certain regulatory environmental offences, it is a valid defence to prove that:

  • all reasonable steps or precautions were taken and all due diligence was exercised to avoid committing the offence; or
  • the act was necessitated by an emergency to avoid a danger to the public.

Ignorance of the law or claiming to be acting under an employer’s instructions are invalid defences.

Liability in share sale/asset purchase

What rules govern the transfer of environmental liability in share sales and asset purchases?

The allocation of financial risk in respect of environmental liability is usually negotiated as a contractual matter and will depend on the commercial context. Liability at law sits with the entity that held the permit or undertook the act or omission at the relevant time.

Where a regulator may take enforcement action against a seller that has since divested itself of the relevant property requiring remediation of contaminated land, the seller may seek to produce evidence of the contractual allocation of liability to a court for enforcement. Part 2A of the Environmental Protection Act 1990 contemplates such allocations and their enforcement by a court.

Under Part 2A, liability for remediating contaminated land initially sits with the parties that caused or knowingly permitted the contamination (ie, the Class A liability group). Unless otherwise exempted or no longer in existence, liability for contaminating the land remains with polluters or knowing permitters that no longer own or occupy the land. Where it is impossible to identify any members of the Class A liability group, liability for remediation falls on the existing owners or occupiers of the land, regardless of their responsibility for, or awareness of, the contamination. Liability is strict and joint and several.

Part 2A provides that parties buying or selling land may allocate (ie, effectively transfer) liability for contamination on that land between themselves contractually, so that one party (often the buyer) accepts liability for the contamination to the exclusion of the other party (often the seller). It further provides that if parties enter into such an agreement to allocate liability, the enforcing authority (ie, the Environment Agency) should generally give effect to the agreement on the allocation of liability as between those parties. A similar provision under Part 2A applies where the land is sold with information regarding the contamination thereon. There is a presumption that where a large organisation buys land, it will have made inquiries as to the presence of contamination. Law Society guidance encourages solicitors to make inquiries as a matter of course.

What environmental due diligence measures are recommended before concluding share sales/asset purchases?

Environmental due diligence is common in commercial transactions, although its extent can vary substantially based on, among other things:

  • the target’s activities;
  • whether the sale is being conducted through an auction;
  • the transaction’s size; and
  • the purchaser’s risk appetite.

Due diligence may extend to:

  • a review of environmental permits and other consents, including any unusual or onerous conditions;
  • environmental reports and audits (both commissioned for the purpose of the transaction and historic);
  • regulatory activity, complaints, notices and claims (whether filed or threatened) and other regulatory correspondence;
  • historic and potential breaches of environmental law and any fines or remediation required by regulators or complaints or litigation in respect of damage or injury;
  • spills, emissions or leaks on or close to the site; and
  • the environmental obligations of the business or that run with the land, including remediation obligations, indemnities and other outstanding liabilities.

Health and safety issues may also be included in environmental due diligence.

Lender liability

Can lenders be held liable for environmental offences?

Liability rarely falls on lenders. However, broadly speaking, lenders can become liable for remediation in certain limited circumstances under:

  • Part 2A of the Environmental Protection Act 1990;
  • the water pollution regime under the Water Resources Act 1991; or
  • the common law of nuisance.

Such liability depends on whether a lender:

  • became involved in the management of the pollution;
  • enforced security; or
  • now owns the contaminated land.

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