Urban renewal and brownfield development is on the rise in Australia. While these projects have the potential for a significant commercial upside, the acquisition and development of any contaminated land comes with risk.
The parties to a sale contract rarely rely on price alone to address the risk. Instead, the parties will typically negotiate contractual mechanisms to allocate responsibility for the contamination such as, among other mechanisms, the seller agreeing to carry out remediation works to enable the buyer to develop the land for a different use.
There are two critical factors to the success of the above contractual mechanism. Firstly, the parties’ objectives for the remediation and development of the land must be understood and agreed. Secondly, the mechanism inserted into the contract must be clearly worded and provide a framework that will satisfy these objectives. A recent ACT Supreme Court case illustrates the type of dispute that can arise if these critical factors are not present.
Interpreting contractual remediation obligations
In Canberra Hire Pty Ltd v Koppers Wood Products Pty Ltd & Anors  ACTSC 162 the Court had to determine the meaning of remediation obligations in a sale contract.
Koppers Wood Products Pty Limited (Koppers) operated a manufacturing facility for treated wood products at its site in Hume, Australian Capital Territory (the Site). Canberra Hire Pty Ltd (Canberra Hire) entered into contract to purchase the Site from Koppers - with the intention of using the Site for a new commercial/industrial use. The parties were aware at the time of entering into the contract that the Site was contaminated.
The contract for sale required Koppers to remediate the Site to certain levels for commercial/industrial use (known as HIL-F) under the National Environmental Protection (Assessment of Site Contamination) Measure 1999 (NEPM), or otherwise as required by any condition of development approval for the change of use (Remediation Obligations). The sale contract imposed restrictions in relation to the timeframe and process for obtaining the development approval.
Koppers remediated the soil (but not groundwater) and obtained certification that the Site met HIL-F levels under the NEPM. Canberra Hire then obtained development approval for the commercial/industrial use. A condition of the approval required the Site to be certified as suitable for the proposed change of use. It was accepted that remediation of contaminated groundwater beneath the Site would be required to comply with this condition.
Canberra Hire claimed, among other matters, that Koppers had failed to satisfy its Remediation Obligations because it had not remediated contaminated groundwater so that the Site was suitable for the new commercial/industrial land use.
In relation to the first limb of the Remediation Obligations, the Court concluded that the term HIL-F is not ambiguous - it is a specific term under the NEPM to measure soil contamination only. In light of this, the Court did not consider extrinsic material to determine its meaning such as, for example, the parties pre-contractual negotiations. The Court did note, however, that even if it did consider this material the parties had differing subjective views on whether use of the term ‘HIL-F’ was intended to include groundwater remediation.
In relation to the second limb, the Court accepted that the phrase ‘or otherwise’ made it clear that the contractual position is remediation to the HIL-F level, but if a condition of approval for the change of use required remediation to a level greater than HIL-F, then Koppers would be obliged to carry out the remediation. The Court held that the development approval obtained by Canberra Hire contained such a condition. The Court accepted, however, Koppers’ technical argument that the application for the approval was not lodged within the strict timeframe imposed in the sale contract and therefore the development approval was not an approval for the purposes of triggering the Remediation Obligations. Therefore, while the fundamental objective of the mechanism was to deliver Canberra Hire a property which it could use for a new commercial/industrial purpose, the objective was overriden by a technical non-compliance with the strict regime for triggering the obligation in the sale contract.
What does this mean for your business?
There are a number of lessons that can be learnt from the above dispute as follows:
- clarify and agree the parties objectives for the remediation and development of the land. This requires identifying the proposed use of the land, the level of remediation that must be carried out to make the site suitable for the proposed use and who will be responsible for carrying out the remediation;
- draft a clearly worded contractual mechanism that provides a framework to satisfy the parties’ objectives. There are a suite of specific terms with specific meanings under contamination legislation, standards and guidelines across Australia. In light of this, be cautious about the use of a specific term unless it is clearly consistent with the parties’ remediation objectives; and
- if remediation obligations are linked to a condition of a development consent (or other approval or event) ensure that the contractual mechanism allows sufficient timeframes and a practicable framework for the remediation obligation to be triggered. Specific timeframes and processes for the remediation trigger can provide certainty for the parties. Be careful, however, to ensure that technical non-compliance with the regime will not override one parties obligation to remediate unless of course this is what the party’s intended. If you are the party relying on the approval or event to trigger the other party’s remediation obligations, ensure that you have implemented the systems and processes to satisfy the timeframes under the contract.